Are foreclosures rising again? If so, by how much? What does it mean for investors?
Yes. The data shows that foreclosures have been rising again. Looking at the percentages of this increase, it seems to even far outpace the rise in home values. Still, it is important to put this in the right context and to understand the drivers, and real impact of this trend.
An Evolving Real Estate Market
On the surface, foreclosure data may paint a picture of two different real estate markets. One which is in deep distress, falling into default, and leading to property value declines. The other seems to just keep on rising.
This disparity may be true to some extent. All real estate is local.
However, as we’ve seen in the past, these economic and real estate cycles seem much more like waves in constant motion. Both on a national, and international scale.
One area may have crested, while another may just be swelling and still heading towards its peak.
Nothing stays the same forever.
How Much Are Foreclosures Rising?
ATTOM Data reported that foreclosures rose 129% in February 2022.
In context, that were only around 25,000 properties in foreclosure across the whole country.
When you consider that in a good month, half a million homes get purchased, that seems like an almost insignificant number of distressed properties. Even more so when very, very few seem to be ending up getting possessed by lenders such as REO.
Still, many more could be on the way. Though one interesting thing is how dense the pockets of foreclosures are. Nationally this number is very small. Yet, in the most active areas for foreclosures, as many as 1 in every 300 to 400 housing units has been in foreclosure. Figures that are very reminiscent of 2008.
Some of these areas include Cleveland, Kissimmee, New Baltimore, and West Palm Beach.
What Are Driving Foreclosures?
Many of these foreclosures are probably part of the hangover of the COVID crisis. Courts and lenders may only now be warming up to process defaults after foreclosure moratoriums.
However, many other drivers are likely leading to much more distress, and a lot more defaults. We appear to be entering a period of stagflation. In which the economy stalls, yet inflation remains rampant.
Farmers are warning that grocery bills will soon rise by $1,000 each month, and there will be more shortages. In NY electric bills are predicted to rise 12% this summer. Insurances and property taxes are already going up, along with interest rates.
Many held on through COVID thanks to bleeding their savings and milking their credit cards. Those lifelines and reserves may now be running out. After falling behind on credit cards and auto loans, the next thing people have to stop paying is their mortgages.
While housing demand pushed house price growth to its fastest on record in February and March 2022, other areas seem to already be declining due to this distress. Nationally, prices may be up over 20%. Yet, ATTOM Data reports house prices already fell by 10% in Detroit and Kalamazoo, MI this year. With Macon, GA down by 15.4%.
What Does It Mean For Real Estate Investors?
This is the moment many real estate investors have been waiting for. More negotiability means better buying prices for investors. They can buy at numbers that make common sense. There is still room to flip them, or margins to hold them, thanks to low-interest rates.
Still, it makes sense to buy low, build in the potential for further declines to projections, to be careful where you buy, and diversify when making a real estate equity investment.
What Does It Mean For Mortgage Debt Investors?
Private investors engaging in the mortgage debt space should also be watching these trends. One of the perks of being in this side of the business is that lenders don’t lose. Even in the case that some borrowers default. There is always the physical asset as collateral.
To invest smartly, diversify, offer lower LTVs, use better underwriting, and have multiple exit strategies. You may instantly flip the debt, hold it, work it out, or own the property.