Have you been looking around the housing market and thinking “There goes the neighborhood”? Well, you are not alone. In May of this year, ATTOM recorded a sharp uptick in foreclosure rates around the United States. Adding up notices of default, repossession by banks and auctions on the calendar, the U.S. Foreclosure Market Report found 35,196 American properties with foreclosure filings.
Forclosure is never a good sign — back in 2008 and 2009, it was a stark symbol of the Great Recession. This current data set shows a 7% increase from April, but twice that much from 2022, with 14% by comparison. However, taking into account all that foreclosures mean, analysts can use the data to predict real estate trends going forward.
Why Foreclosures Now?
Talks of another recession have been going on for the better part of two years. Does this spike in foreclosures signal another one? And if so, why now? There are main factors, but one that’s been around for a little while now: COVID-19.
“…the lifting of all COVID-19 related moratoriums that have finally unclogged the pipeline of distressed properties,” said Kristen D. Conti, the co-chairwoman of Default Industry Leaders. “Those people who chose to take advantage of programs where they could not pay their mortgages and put the payments on the back end of the loan are now faced with homes whose prices are leveling out and they find themselves underwater.”
“The escalation of prices put many marginal buyers at the very top of their qualifying range,” Conti said. “Any change affecting household income can be catastrophic right now as prices become more prevalent and prices decrease.”
And there are some telltale signs that more bad news might be on the way.
Increased Housing Inventory
Conti explained that new construction is being delivered to the market on a consistent basis, pumping up the inventory while demand has taken a deep decline because of high interest rates.
“It’s worth noting that the rise in foreclosures could lead to an increased influx of distressed properties onto the market, which would create a buyer’s market with opportunities for those who are looking to invest in real estate,” said Michael Branson CEO of All Reverse Mortgage, Inc. “This could result in a decrease in prices or rental costs over time and could provide a great opportunity for investors or people looking to purchase a home.”
“We have sellers married to their current low interest rates who are afraid to make a move and give these up for rates that are almost double,” said Conti, who is also a broker-owner at Peacock Premier Properties. “Our inventory problems would be alleviated even more if these sellers would put their homes on the market.”
Home Prices Might Stabilize
Depending on where you live, you might notice that the cost of a home might remain in one place. Might being the operative word.
“With an increased inventory, there might be some easing of the intense competition we’ve been observing in the housing market,” said Nate Johnson, an investment and property management expert at NeighborWho. “This could contribute to a stabilization of home prices, making it more accessible for buyers who have been priced out of the market in recent months.”
“For savvy investors, the rise in foreclosures could present an opportunity to acquire properties at a discounted price,” Johnson said. “Investors can then focus on renovations and improvements to increase the property value, or convert them into rental properties to take advantage of the shifting rental market.”
The Rental Market Will Shift
“What many people don’t realize is just because a person has equity in their home, it doesn’t necessarily mean they can make the payment on it,” Conti said. “Increasing insurance costs and taxes can easily push someone beyond their budget.”
So when Americans cannot afford to put a downpayment on a home or pay all the costs associated with a house, the fall back solution is finding a rental property instead. This could potentially be good news for homeowners looking to make some extra money with their real estate investment by jumping into the rental market.
“As more properties become available, we may also see an increase in the number of renters,” Johnson pointed out. “Former homeowners who faced foreclosure might turn to renting as a more affordable housing option, which could result in an expansion of the rental market.”
Should You Worry?
Not just yet, according to the experts.
“I believe foreclosure rates will continue to increase,” Conti said. “I know the clients I work with are gearing up their loss mitigation departments in preparation for what is next in our market.”
“Even though foreclosures are spiking, it’s not the big deal everyone is making it out to be. We are just reaching a more normal level of foreclosure filings,” said Brian Wittman, owner/CEO at SILT Real Estate and Investments.
“According to ATTOM, there were approximately 150,000 foreclosure filings in Q1 of 2019,” Wittman said. “There are still only roughly around 100,000 in Q1 of 2023. It is a rise year over year of approximately 10%. It still doesn’t appear to be the issue everyone thinks it will be.
What would be the canary in the coal mine?
“Seeing a spike of 50% to approximately 150,000 foreclosures in one quarter would be a sign to worry and pay more attention,” Wittman said.
“We certainly don’t expect another downturn like 2008 but some stabilization and balance are a welcome change from the Post COVID craziness of multiple offers, waiving of inspections and appraisals and other risky decisions,” Conti said.
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