Bernice Ross of Inman recently interviewed Rick Sharga, the executive vice president for market intelligence for Attom Data, about his predictions about general trends and foreclosures.
Will there be a foreclosure tsunami in 2023?
Attom Data has been tracking foreclosure data since 1996. As a result, Sharga often gets asked if we should expect another foreclosure tsunami in 2023 like the one we experienced during the Great Recession.
According to Sharga, there’s good news:
There’s virtually no chance we will see that foreclosure activity again. Before the pandemic, foreclosure activity was low compared to historical numbers. That was primarily because of changes in lending practices that were put in place back in 2010 as part of the Dodd-Frank Act, including the Qualified Mortgage Rules and the Ability to Repay Rule.
Sharga said these changes have resulted in more qualified borrowers than in the past. Loan performance has also been solid, causing foreclosure activity to drop from the typical 1 percent level of about 550,000 loans (based upon 55 million U.S. mortgages) to about 250,000.
Impact of COVID
Two additional programs that dramatically reduced the number of foreclosures were the “foreclosure moratorium” and the forbearance programs. Sharga explained that during the almost two years the foreclosure moratorium was in effect: The only foreclosures were on commercial loans and vacant and abandoned properties.
In addition, the forbearance programs allowed homeowners to call their mortgage servicer and say the pandemic had impacted their income. Forbearance allowed borrowers to postpone their mortgage payments for up to two years.
About 8.3 million borrowers took advantage of that program. There are only about 300,000 left in the program. There would be even fewer, except we had some people from Florida raise their hands after the hurricane last month. The bottom line is that it’s been an incredibly successful program and probably prevented 3 million to 4 million unnecessary foreclosures.
As we exit those government programs, we see foreclosure activity at about 50 percent of where it was in 2019. So, we could double (that number) and still not be back to normal levels of foreclosures. So, there’s no giant foreclosure tsunami building up.
What’s different about today’s foreclosure market compared to the Great Recession?
Sharga also says there’s another significant difference in the foreclosure market today as compared to the Great Recession:
Ninety-three percent of the borrowers who are in foreclosure today have positive equity in their homes. That’s the opposite of where we were back in 2008, where one-third of all borrowers were underwater. While foreclosure starts are edging up, we do not see many bank repossessions. (Instead), these borrowers in distress are executing a soft landing. They’re finding a way to sell their home before the foreclosure auction at a profit and getting a fresh start.
The ones that get to the auction sell at about a 70 percent rate, about twice the average. Investors are going to those auctions and gobbling up these properties. So, between fewer properties getting to auction and fewer properties getting past the auction, there are fewer properties for the lenders to repossess.
What’s your forecast for 2023?
Sharga said Attom’s data is pretty much in alignment with what NAR and other outlets are reporting. For example, according to Freddie Mac, we have never experienced a doubling mortgage rates in a single calendar year. The result has been that affordability has taken a major hit. There has also been a significant decline in the number of transactions.
Prices have declined for the last four months on a month-over-month basis, although they’re still up on a year-over-year basis. In 2021, we had between 6.1 million to 6.2 million in houses sold. There were 5.0 million to 5.1 million sales in 2022. In 2023, we’re predicting sales in the 4.8 million to 4.9 million range. A lot of it depends on what happens with home prices.
Nevertheless, Sharga was optimistic:
Mortgage rates may have already peaked since they have plateaued or even declined in some cases. However, the Fed is starting to get inflation under control and to act less aggressively on raising the Fed funds rate. As a result, mortgage rates will eventually work their way down back into the fives in 2023, and we could see a recovery in the housing market as early as the middle of 2023.
Will low inventory create a seller’s market in 2023?
Sharga argues that we will see a seller’s market, but nothing like what we experienced over the last few years.
The lack of inventory and demographically driven demand will help keep home prices from cratering, so that’s a good thing. The builders have pulled back on housing starts significantly since the market turned. That’s not a bad thing either because one of the problems during the Great Recession was builders overbuilt. During the crash from 2005 to 2007, we had a 13-month supply of homes.
He said that the builders aren’t going to rush back into the market until the buyers come back. In addition:
Since 70 percent of homeowners have mortgage rates of four percent or less, they are likely to be reluctant to sell for a while and take on a higher interest rate. As the market recovers, I think it will move slightly back toward a seller’s market but not as fully back as it was in the early part of 2022 or 2021. You’re not going to have 30 people bidding on your house when you put it on the market. It would help if you were realistic about your price.
Sharga’s final take on the 2023 market is that it will be another challenging year for housing, but not as dire as some of the forecasts we’re seeing. Market conditions in 2023 vary wildly across the country.
Bernice Ross, president, and CEO of BrokerageUp and RealEstateCoach.com, is a national speaker, author, and trainer with over 1,000 published articles.
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