Where is the Foreclosure Wave?

One of the reasons clients gave me last year for deciding to postpone buying a home was that they were waiting for the real estate market to crash and prices to drop. However, as of January 2022, this has not happened.

In my previous post, I explained the reasons why I believe the real estate market in our area remains strong. This time, I want to delve into the topic of foreclosures, because despite a large number of homeowners taking advantage of one of the bank assistance plans at the start of the pandemic (Forbearance), the rate of unpaid loans has not skyrocketed.

There is a study by the Mortgage Bankers Association (MBA) that shows that out of the total homeowners who requested to pause their mortgage payments due to the pandemic, at least 38.6% have reinstated their accounts, either by paying off their debt or paying off the entire loan (by selling or refinancing).

On the other hand, around 44% of homeowners who benefited from forbearance have renegotiated their debts or entered into a payment agreement with their bank and are up-to-date on their payments. Additionally, 0.6% of the total sold their homes in a short sale or returned their home to the bank (deed-in-lieu foreclosure).

So, only 16.8% of all the loans that were in the forbearance program have ended the program and have not accessed any option to mitigate a loss. However, they still have the opportunity to do so.

Will we see a wave of foreclosures that brings down home prices? Absolutely not. On the contrary, in the last two years, there have been fewer foreclosures (less than half) than in previous years. The increase in home prices and the accommodations that banks have provided to avoid this scenario have been clear incentives for this to happen.

It has been very interesting to follow the real estate market’s behavior over the last two years and see the positive trends in prices. In my opinion, the rise continues, less steep than in 2021 but definitely positive, as the other problems arising from the pandemic (the shortage and rising prices of construction materials, along with the lack of labor) have prevented the new home construction market from returning to pre-pandemic levels.

Even in the worst-case scenario, if that 16.8% of homeowners who have not yet reinstated their debts were to lose their homes tomorrow, it would not affect prices since the very low inventory and high demand would immediately absorb the effect. We need more homes for sale, as we have at least a 6 to 7-month backlog of inventory to meet the current demand for homes.

In summary, if you are a homeowner and have ever doubted your investment, rest assured because you will continue to make money. And, if you haven’t bought your home yet, calculate what you’ve lost by delaying the purchase and add to that loss the extra you’ll pay now that mortgage interest rates are higher than last year.