Some people are concerned by the idea of the housing market heading for another crash like the one we experienced in 2008, because of the dramatic changes in mortgage rates this year. However, there are significant differences between the current situation and the housing bubble that severely affected the nation in the mid to late 2000s.
The fact that there are far fewer foreclosures in this market is one of the main indicators that this time things are different from the last housing crisis.
This time, there aren't as many troubled homeowners.
Over nine million households lost their homes as a result of foreclosure, short sale, or bank takeover after the 2008 bubble. This was mostly due to very loose lending criteria and lack of regulation, a situation that allowed consumers to obtain mortgages that they could not afford in the mid or long-run. These lending practices provoked a tsunami of foreclosed homes to enter the market, which caused home values to drop dramatically.
In today's market, more eligible buyers are available because of increased regulation and updated lending criteria. As a result, the number of homeowners who are late on their mortgages has decreased. The Mortgage Bankers Association (MBA) Vice President of Industry Analysis Marina Walsh explains: “For the second quarter in a row, the mortgage delinquency rate fell to its lowest level since MBA’s survey began in 1979 – declining to 3.45%. Foreclosure starts and loans in the process of foreclosure also dropped in the third quarter to levels further below their historical averages.”
Over the past two years, there have been fewer foreclosures
Even if you have seen articles describing how the number of foreclosures is increasing, context is crucial. Many homeowners were able to use the forbearance option to stop making mortgage payments throughout the pandemic. The program provided struggling homeowners more time to organize their finances and, in many cases, come to an agreement with their lenders.
Many worried that the end of the forbearance option would cause a flood of foreclosed homes to hit the market. Those worries never materialized. According to data from the New York Fed, fewer foreclosures are taking place now than there were before the pandemic. This indicates that even though there are more foreclosures now than there were last year (when foreclosures were paused), the number is still significantly lower than what the housing market has experienced in a more typical year, like 2017-2019. Most importantly, the figure we're seeing right now is still considerably lower than the figure we saw just before the market fell. The main lesson? Don't be fooled by a misleading headline. Despite an increase in foreclosures year over year, the historical context is crucial to get the complete picture.
Most homeowners have enough equity in their homes to sell them.
Today, a lot of homeowners have enough equity to sell their properties rather than risk foreclosure. Over the past two years, home values have increased quickly, and as a result, ordinary homeowners have amassed record levels of equity in their properties. They might have more equity than they think if they've been in their homes for a long period of time. According to Ksenia Potapov, an economist with First American: “Homeowners have very high levels of tappable home equity today, providing a cushion to withstand potential price declines, but also preventing housing distress from turning into a foreclosure... the result will likely be more of a foreclosure ‘trickle’ than a ‘tsunami.’”
A recent report from ATTOM Data explains it by going even deeper into the numbers: “Only about 214,800 homeowners were facing possible foreclosure in the second quarter of 2022, or just four-tenths of one percent of the 58.2 million outstanding mortgages in the U.S. Of those facing foreclosure, about 195,400, or 91 percent, had at least some equity built up in their homes.”
Remember that context matters when reading headlines in general and house-market headlines in particular, especially in regard to the effects of increased mortgage rates on the rising number of foreclosures in today's market. Although there have been more foreclosures this year than last, they are still significantly lower than in the years prior to the pandemic. Get in touch with Laura Larson right away if you have any inquiries!