With fluctuating mortgage rates and economic pressure in the housing market, foreclosure activity Has continues to ramp up throughout the year. According to real estate data provider Attom, homebuyers may face more challenges heading into 2025. Why are foreclosure filing rising now, is this a hiccup in the data or are we at the beginning of the next cycle?
When will we see larger increases in foreclosure filings?
Although, foreclosure filings have increased, they are still well below pandemic levels. What will cause foreclosure filings to increase further. Below are 4 factors that will increase filings
- Correction in the stock market: A large decline in the stock market will lead to a decline in the “wealth effect” where people feel less wealthy and therefore purchase less items. This negative sentiment could flow into housing leading to slowing sales
- Continue migration back into the urban cores: There was a huge push into far out suburban/exurban areas that over the long haul will be risky as city life returns with businesses, entertainment, etc… this will cause a large decline in values in these areas.
- Uptick in unemployment: Unfortunately, inflation has now become entrenched, and the federal reserve has embraced a new motto of higher for longer. Although the fed has hinted at moderate cuts, their ability to make big cuts is going to be limited due to the huge deficits and inflationary pressures. As rates stay higher for longer, ultimately something will break in the economy and lead to an uptick in the unemployment rate. As unemployment increases, we will see an increase in defaults as more are forced to sell or get foreclosed on for nonpayment.
Will foreclosure filings reach pre pandemic levels?
I think foreclosures will fall back into prior patterns and reach pre-pandemic levels (06-07 time frame) as stimulus wears off, the economy slows, and in turn real estate slows. We should see an indication of the depth of the foreclosures to come later in 2025 as we get a better view of the four items above.
Will foreclosure levels rise to similar highs as the last recession?
There are two major changes between 2008 and now, Wall street an subprime variable rate products. Since the last recession wall street has gotten in on the single family home market similar to what occurred years ago in the apartment market.
As prices of residential properties begin to fall/correct, there are huge funds waiting to buy investment single family homes. They would buy these homes in bulk from banks, the federal government, etc… which will ensure that prices do not fall precipitously as there will be substantial demand for these defaulted properties. The shear amount of available institutional capital waiting to invest in single family rental homes will put a “floor under prices” and ensure that this real estate cycle is not nearly as deep as 2008.
Fortunately, I also do not see a repeat of the subprime crisis that led to huge market corrections in 2008. The percentage of variable rate loans is historically low, so the interest rate risks are not large enough to cause a total real estate melt down.
Summary
Just like the stock market, real estate is set for a bumpy ride over the next year or two. Foreclosure filings will continue to rise as we revert to more traditional real estate patterns. Fortunately, this real estate market will not be a repeat of 2008 as there is substantial institutional/wall street money waiting to buy any small dip in real estate.
This should put a floor under prices and lessen the downside risk in this cycle but there will still be a correction in prices as rates remain higher for longer. This correction looks like it will be under 15% in most markets which is still large (the one caveat is the condo market), but after 30-40% gains year over year in many markets this should be expected.
Additional Reading/Resources
https://www.fairviewlending.com/president-fires-federal-reserve-governor-mortgage-rates-rise/
https://www.attomdata.com/news/most-recent/foreclosure-rates-by-state/
https://www.housingwire.com/articles/foreclosure-filings-october-2024-attom-data/
https://www.fairviewlending.com/stock-market-crash-impact-on-real-estate/
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Glen Weinberg personally writes these weekly real estate blogs based on his real estate experience as a lender and property owner. I’m not an armchair reporter/writer. We are an actual private lender, lending our own money. We service our own loans and own commercial and residential real estate throughout the country.
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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