A Foreclosure Breakdown
Homeowners across the U.S. are healthier than ever before, which will prevent a sharp rise in distressed sales.
People often jump to incorrect conclusions. When an airplane experiences turbulence, many passengers assume that the plane is going to crash. Many flights experience turbulence, but it does not necessarily mean disaster is imminent. In watching a favorite sports team fall decisively behind at the beginning of a game, fans often give up hope, feeling certain that their team will lose. Falling behind early is a challenge, but it does not determine the outcome. There are countless examples of teams clawing their way back to victory.
Similarly, many have drawn an incorrect conclusion regarding housing. The housing market has been critically unaffordable for over three years, resulting in a waterfall dive in the number of closed sales. As home prices skyrocketed during the pandemic, followed by mortgage rates more than doubling, the pool of potential buyers evaporated. As a result, many people have mistakenly assumed that the housing market would resemble the Great Recession, with a flood of foreclosures. Unfortunately, the general public often jumps to conclusions without considering all the facts and trends.
The Great Recession was fueled by a credit bubble inflated by loose lending standards, which allowed just about anyone to obtain a loan. There were subprime loans, pick-a-payment plans, zero-down-payment loans, teaser-rate adjustable mortgages, and numerous fraudulent lending practices. Many borrowers qualified despite having poor credit scores. These high-risk borrowers were vulnerable to fluctuations in their rates or economic changes. Thus, a flood of foreclosure and short sale activity developed.
It is far different today. With tight lending standards that date back to the Dodd-Frank Act of 2010, the number of foreclosures and short sales has dwindled to only a handful. In Los Angeles County, there are 56 foreclosures and 51 short sales available for purchase, totaling 107. That is only 0.7% of the 14,725 homes available today. Last year, there was a total of 80, and there were 48 two years ago. In 2022, there were a total of 51 distressed listings. In 2019, before COVID, the number of foreclosures and short sales was 154, higher than today.
A similar story unfolds for closed sales. There were 20 foreclosure closed sales and five short sale closed sales in August, totaling 25, or 0.6% of all sales. Last year there were 18 total, and there were 23 two years ago. The pre-pandemic 3-year average was 105. In August 2009, there were 2,585, a revealing 44% of all closed sales.
People rooting for the demise of the housing market broadcast the “substantial changes” in foreclosure activity. When there are virtually no distressed sales, even a slight rise can be distorted when examining the percentage change. For example, the number of distressed sales “jumped” from 18 to 25, which is a 39% increase. The percentage change lacks proper context. In these circumstances, it is better to examine where distressed sales have occurred over time. The real story is that the number of distressed will increase and return to pre-pandemic levels. The rise will not be indicative of a flood of foreclosures and short sales, but more of a return to normal levels.
The national delinquency rate is currently at 3.27% of all loans, which remains at historically low levels. It is still far below pre-pandemic levels of 3.85%. From 2000 to 2005, the delinquency rate averaged 4.35%. There is a limited number of homeowners across the United States who have entered the foreclosure process.
Today’s housing stock is the strongest ever. Ever since the Great Recession, buyers have been purchasing homes with stricter qualifications and lending standards, higher down payments, strong credit, good jobs, and low fixed payments. There is a record amount of tappable equity (the amount of equity a homeowner can use for a loan while still retaining at least 20% equity), a record number of equity-rich properties (those with 50% or more equity), and a record number of homeowners who own their homes free and clear. There will be no repeat of the Great Recession because of the strength of the homeowner and the limited supply, even if the supply eventually returns to pre-pandemic levels. There will be no flood of foreclosures.
