Foreclosure Starts Are Changing: What It Means For Housing

Fire up YouTube and search "foreclosure," and you'll find some daunting headlines. "371% SURGE in FORECLOSURE Starts," Foreclosure Report - SHOCKING," and "No Escape - Foreclosure's Now Coming," just to name a few. Is this something we really need to worry about?

The best way to start to analyze the "coming wave" of foreclosures is to break down the current pipeline of loans and observe forming trends. But that's not enough. We also need to study home prices, the inventory of homes for sale, mortgage interest rates, and the economy (specifically employment rates).

Today's quarterly analysis of the mortgage market (relying heavily on the Black Knight Mortgage Monitor) yields everything you need to know to be prepared for the impact of foreclosures on the US housing market.

Overview Of The US Mortgage Market

The first chart in our report is an overview that Black Knight uses on its cover of September's "Mortgage Monitor."

The mortgage delinquency rate fell yet again to 2.78%, well below pre-pandemic levels, and just 3 basis points off of May's record low. This should be a bit surprising to people watching the hype-videos on YouTube.

So let's examine what Black Knight reports about our headline (Foreclosure Starts Are Changing).

Black Knight reports that foreclosure starts dropped more than 9%, and September's 18K starts remained 53% below pre-pandemic levels.

As a reminder on tracking foreclosure sales, we track starts (the beginning of the foreclosure process) and foreclosure sales to get an early warning on growth in the foreclosure pipeline. Most starts do not result in a foreclosure sale, but it is still good relative information to track.

So foreclosure starts are changing, just not how the hypesters want you to believe they are changing.

Prepayment activity is down 73% year-over-year (versus September of last year), not surprising as mortgage interest rates have doubled + in that time span, reducing the benefit of refinancing for most homeowners. The dwindling supply of distressed property (coupled with rising mortgage interest rates) has cooled the refinance activities that had been the top solution for delinquent borrowers.

Before we move on, let me emphasize the importance of each graph in today's report. These graphs contain the FACTS while ignoring the hype that most online reports present in order to gain views.

National Delinquency Rate On First-Lien Mortgages

This graph plots the national delinquency rate on first-lien mortgages, demonstrating very positive trends in the US mortgage pipeline.

In the graph above, the dark line plots the quarterly delinquency rate, the light-green line plots the average recorded from 2000 through 2005, and the gray line plots the record-low delinquency rate. Black Knight provides the 2000 to 2005 average as a reference to what the market looked like before the housing bubble so that we have a basis to forecast the next similar market behavior. Here's what Black Knight reports:

1. The national delinquency rate fell to 2.78% in September, down one basis point from August, and just 3 basis points off the record low set in May earlier this year.

2. The delinquency rate decline in September ran counter to the typical growth of 27 basis points that was averaged from 2000 to 2005.

3. The national delinquency rate is now 41% lower than the pre-Great Recession September average of 4.66%.

These three observations demonstrate a strong current housing market in terms of distressed properties and rebuffs claims that a flood of foreclosures is heading our way. But let's dig deeper!

Current Delinquencies By Severity

This graph segments mortgage delinquencies by severity.

The number of 30-day delinquencies rose by 1% last month, while the 90-day delinquent loans fell 1.5% and are now only 24% above pre-pandemic levels. Foreclosure starts declined by 9% to 18.4K, holding the line at 3% of serious delinquencies in September, down slightly month over month and less than half of pre-pandemic levels.

An important point that most YouTube Hypsters either fail to understand or perhaps purposely overlook in their reporting is that the market anticipated much greater foreclosure activity this year due to a stockpile of delinquent loans that were not addressed over the past two years. Once COVID hit in March 2020, lenders were not allowed to foreclose on most home loans that were delinquent during the pandemic until this year, so the decline in foreclosures is the opposite of market expectations (we address the "why" later in the report).

The total number of delinquencies has been reduced by more than half since the start of the pandemic two years ago, and delinquencies are now lower than pre-pandemic levels (teal line). Serious delinquencies (those that have been delinquent for more than 90 days) continue to fall and are approaching the pre-pandemic level.

Forbearance Plans Failed To Kill Housing

Forbearance plans are agreements between borrowers and lenders that, for a set period, allow the non-payment (or partial payment) of a loan to help borrowers retain their homes. Many lenders used the forbearance process as a quick fix when COVID hit the US, and more than 8.4M borrowers entered into forbearance agreements with their lenders. It was not long ago that hypesters on YouTube claimed that Forbearance Plans would lead to millions of foreclosures (which would kill the housing market).

This graph plots the number of loans on active forbearance plans. There were nearly five million borrowers who went into forbearance at one point early in the pandemic. Forbearance leading to foreclosure was all the hype on YouTube for more than a year, but it never materialized. None of the YouTubers considered the other factors involved, like equity in the housing market and the diminished supply of homes for sale.

The 515,000 remaining borrowers on forbearance plans are 20% fewer than what we reported three months ago and now measure at just 1% of all active mortgage loans in forbearance.

The remaining pipeline of loans in forbearance should decline by about 70K per month and soon be a footnote in the housing market history. As you'll see in the following pie chart, the Forbearance plan was successful in protecting homeowners during the initial days of the pandemic.

COVID Related Forbearance Plans Did Not Destroy Housing

This pie chart reveals what happened to the 8.3 Million loans in forbearance that were COVID related.

8.3M borrowers have been in forbearance at some point since the onset of the pandemic. 93% have since exited their plans, with more than half returning to making mortgage payments one-third have paid off their mortgages in full, six percent on still on their plans, 7% are working through loss mitigation, and just 1% (94,000 loans) are in foreclosure.

For all those reporters who came forward with foreclosure warnings when loans en masse went into forbearance, I'm curious about what they were thinking. The US housing market is flush with equity, so it was not likely to see foreclosures even as a worst-case scenario. For the majority of those that were not able to make the payments on their homes, they could have sold their homes, paid off the debt, and walked away with a good deal of money.

This is what I reported right after the forbearance plans went into effect, yet most other "experts" were expecting (or at least proclaiming) that the market would collapse. False or ignorant reporting is rampant across every industry, as anybody can post an opinion online. My recommendation: Stick with the facts and ignore the hype!

Recession Or Recovery?

Whether or not you believe that the US is in a recession (after all, the "experts" do not agree), you have to acknowledge that there is ample fear about the stability of the US economy. Regarding real estate (and home sales in particular), I focus on employment, as most people rely on their earnings to pay for housing.

This graph plots the average annual unemployment rate for each year since 1991. The blue dashed line reveals that the average unemployment rate for the past 31 years is 5.8%, a whopping 58% higher than this year's average of 3.66%. Looking closely at this year in the graph, you'll see that we are very near a 30-year low.

The economy might be in grave danger, or perhaps it's the best it's ever been. What I know is that a high percentage of people have jobs, and continued high employment levels will likely work to push home prices (and rents) even higher.

Black Knight Home Price Index

The following graph is the Black Knight Home Price Index, it parallels the results from several other data sources that I use.

This graph plots the 1-month percentage change in home prices in blue (recorded on the right vertical axis) and the annual home price growth rate in green (recorded on the left vertical axis).

Housing market watchers are split on whether we will see meaningful price declines in coming months – or even years – due to low affordability or a more lateral correction moderated by historically low inventory.

September’s data brought fodder for both sides of the debate, with home prices slipping for a third consecutive month, but at 0.52%, less than half the monthly declines seen in July and August.

All in, prices have fallen 2.6% since June – the first 3-month decline since 30-year rates spiked to nearly 5% in late 2018 and the worst 3-month stretch since early 2009. Over that same 3-month span, the median home price fell by $11,560. Annualized appreciation slowed to 10.7%, still more than twice long-term norms, and while indicative of continued correction, the 1.2% decline from August is the smallest seen in four months.

Home Price Growth Rates

We know that real estate is local, and that means price changes might be different in your area than they are in others.

The two tables above list the most (and least) affordable cities when comparing payment-to-income ratios.

The first thing that caught my attention is that more than half of the least affordable cities are in California, while none of the most affordable cities are located in California. I often get comments on our YouTube channel telling me I'm wrong on home prices, and when I ask most of them where they are from, it's usually a western-state.

It's important to study trends in the US housing market, but make your purchase and sale decisions based on local housing market data.

Home Affordability Is Bad, But It's Been Worse

One way to measure home affordability over time is to examine the ratio between monthly mortgage payments and borrowers' income, we refer to this as the payment-to-income ratio.

This graph plots the National Payment-to-Income Ratio. It is measured as the share of median income needed to make the monthly principal and interest payment on purchasing the average-priced home using a 20% down, 30-year fixed-rate mortgage at the prevailing interest rate.

With 30-year rates nearing 7%, it takes ~39% of the median household income to make the principal and interest (P&I) payment on the average-priced home purchase, the highest such share since 1984 and well above the long-run average of just under 25%.

The last time affordability was this tight, 30-year rates were over 13%, roughly twice today's 30-year fixed mortgage interest rate. Buying power has been cut an additional 14% by rate increases even as home prices have pulled back from June 2022 peaks and today's buying power is now down 38% from last year.

The monthly P&I payment on the average home purchased with 20% down is up $937, marking the sharpest annual rise on record dating back to the mid-1970s.

Since the data for this graph was pulled in late October, we have seen mortgage interest rates come down nearly 1/2%. Regardless of today's exact rate, the US housing market continues to run extremely tight from an affordability perspective.

Low Supply Of Homes For Sale

One way to forecast future home prices (as well as the likelihood of a foreclosure crisis) is to evaluate the existing supply of homes for sale and compare it with the current demand rate.

This graph plots the current supply and demand for homes in the US. The blue bars measure the number of active home listings on the left vertical axis, while the red line plots the months of supply of homes by using current sales data (and reported on the right vertical axis). Finally, the gray dashed line measures the one-year average of the months of supply.

Unfortunately, we still see the trend falling in the supply of homes relative to the current demand rate. The numerous reports across the internet warning of rising inventories are either wrong or very local to specific markets (which we address below).

Currently, the supply of homes for sale (relative to the current demand rate) is still falling. When we look at the far right of the graph, the blue bars show that the current inventory of homes is right at one million homes.

Contrast today's supply with the four million plus homes in inventory at its highest point back in June 2007. That means today's supply is 75% lower than the market observed at its peak and lower than at any time going back 23 years. It's very hard to anticipate a near-future rush of foreclosures when the market is clearly in control of home sellers.

US Annual Home Price Growth Change By Metropolitan Area

Annual home price growth rates are universally coming down across the country, though some markets are proving to be more resilient than others.

What many confuse (when discussing falling home price growth rates) is that most markets are NOT seeing falling home prices; rather, they are seeing the rate at which home prices grow coming down. One extreme example is Miami, FL (bottom right on the graph), where the growth rate is DOWN to 23% year-over-year!

Migratory inflow and a corresponding lack of inventory continue to put upward pressure on prices in such markets.

If prices held steady at their current levels, it would take until early February or March 2023 for the annual home price growth rate to hit its long-run average and until April for price growth to be down year over year.

Equity In The Housing Market

This next graph was not part of the Black Knight report, but it reveals why we’re not worried about a foreclosure crisis today and why the current market is vastly different from conditions observed in 2009.

The graph above plots both equity and debt in the housing market, and all we need to do is a "now versus then" study to see why today's environment is so different from the housing market recovery more than ten years ago.

From 2006 through 2014, there was no equity in the housing market. Simply put, Americans owed more on their homes than the homes were worth. If a homeowner became delinquent, no solution made lenders whole again. Foreclosures resulted in losses to the borrower and the lenders.

Today is completely the opposite. There is equity again in the housing market, and more so than at any time in the past! For most borrowers who become delinquent today, the remedy does not have to be a foreclosure sale. Instead, delinquent borrowers can sell their homes on the open market, repay their debt, and many will walk away with cash!

My Real Concerns For Housing

The Black Knight continues to report the supporting data that demonstrates foreclosures are not a concern for the US housing market. Again, I reiterate that there IS a housing crisis, but it is not one of defaults and foreclosures; rather, it is one of historically low supply, soaring home prices, and soaring rents, all leading to the devastating decline of home affordability.

I expect to see people with great credit being forced into the “for rent” market simply because there are not enough homes to be found at affordable prices. This increase in demand in the rental market will continue to push rents higher at an unhealthy rate, and we’ll see lower-wage earners struggle to find adequate housing.

Wall Street is making a big push into housing, and what has traditionally been a greatly decentralized housing market will see “BIG BUSINESS” gain market share, leading to implementing controls that will make it harder for many Americans to afford a home. Big corporations like Amazon are not only hurting local retail businesses, they are now attacking housing, perhaps the last of the untouched small business community.

Foreclosures and forbearance loans were protected by rising prices and diminished inventories of homes for sale, but what will protect us from Big Business coming in and buying up a large segment of our local housing markets? This should be your primary concern for housing, not the distracting hype about foreclosures, forbearances, and prices crashing.

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