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Foreclosures & Clickbait: Facts vs. Fiction in 2024

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We are in the midst of a historic housing crisis, but does that mean we're facing a foreclosure crisis?We are in the midst of a historic housing crisis, but does that mean we’re facing a foreclosure crisis?

Amid swirling headlines and speculative forecasts, it’s crucial to separate fact from fiction. This report embarks on a meticulous journey through the latest data and trends to uncover the truth behind sensational claims regarding foreclosures and distressed properties.

Focusing on delinquency rates, foreclosure starts, and homeowner equity, this article delivers a comprehensive analysis that cuts through the prevailing narrative of doom. Are the alarm bells justified, or is the market more resilient than we’re led to believe?

Join us as we dissect the numbers, challenge the hype, and offer a clear-eyed assessment of the housing market’s current state. This is not just another commentary; it’s a deep dive into the facts that matter.

Delinquencies Tick Up – Foreclosure Starts Plummet

Our report begins with an analysis of the number of borrowers who are behind on their mortgage payments. After all, if the massive foreclosure crisis predicted by YouTube hypsters is to materialize, it will originate from the segment of homeowners failing to make their mortgage payments.

Foreclosure crisis in the US housing market?

The national delinquency rate increased to 3.57%, up marginally from November, largely because December ended on a Sunday. This timing delayed payment processing on the last day of the month. The payments recorded after the end-of-month weekend that were received on time will not be marked delinquent, even though they were included in the delinquency report.

While the increase of 5.6% was higher than the typical December rise of 1.4%, it was less severe compared to previous Decembers ending on a Sunday, which have historically seen delinquencies surge by an average of 9.9%. Hypersters pushing scare tactics from the December report either do not know what they are talking about or are purposely misusing the delinquency report to generate clicks.

Delinquencies rose across all categories, with both inflows and progression to later stages of delinquency increasing, while recoveries from both early and late stages saw improvements. Most importantly, serious delinquencies climbed to 475,000 loans but were still 19% (or 108,000 loans) fewer than last year’s levels.

National Delinquency Rate Hovers Above All-Time Low

This graph analyzes the percentage of borrowers behind on their mortgage payments. After all, if the massive foreclosure crisis predicted by YouTube hypsters is to materialize, it will originate from the segment of homeowners failing to make their mortgage payments.

National delinquency rate of first-lien mortgages

The black line charts the average delinquency rates from 2000 to 2005 for comparison, whereas the blue line represents the current delinquency rate among borrowers. The all-time low in delinquency rates was noted just over a year ago, with today’s rate at 3.57%, only marginally higher than this historic low.

Given that mortgage payments are being made at near-record levels, why are we hearing about foreclosures on the rise? Roughly 96.4% of borrowers are current today, close to a 22-year high (and perhaps even longer, though we do not have that data). So, if you’re looking for a foreclosure crisis due to delinquencies, you will struggle as the market is nearly less delinquent than ever.

Who Has Been Borrowing Mortgage Money Lately?

A YouTube channel covering foreclosures suggested that lenders, facing a downturn in the market, are now eager to issue loans and have thus relaxed borrowing standards to meet quotas. This rationale seemed plausible, prompting me to collect data to assess the validity of the claim.

Low credit score loans are at all-time lows

My research revealed quite the contrary situation. In 2023, the number of borrowers with credit scores below 660 who successfully closed on their loans hit a 21-year low. Given the high numbers recorded from 2003 to 2007, this recent figure likely sets a record for an even longer period. It’s evident that today, few borrowers with low credit scores are getting loans.

Are Recent High-Interest-Rate Mortgages Crashing?

One YouTube channel concluded that loans established a few years ago, when interest rates were low, are performing well today. However, it suggested that loans issued in the past two years, carrying interest rates well above 6%, are lagging and will trigger the next wave of foreclosures. This theory seemed to make sense, prompting a closer examination of the data to verify these claims.

Early payment delinquencies, measured six months after origination, have been climbing gradually among both FHA and VA loans in recent years and are worth watching closely

FHA loans, representing less than 15% of the mortgage market, stand out as the only mortgage product with a higher delinquency rate than pre-pandemic levels. While VA loan delinquency rates have reverted to pre-pandemic figures, they are slightly higher than their levels at the onset of the pandemic. On the other hand, portfolio loan delinquencies are well below pre-pandemic levels, only marginally above their record low in August 2023.

Early payment delinquencies, observed six months post-origination, have gradually increased for both FHA and VA loans in recent years, signaling a trend that merits close attention. However, we are much closer to record lows in delinquency rates than to a threshold that would justify hyped-up alarmist foreclosure reports.

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Wave Of Foreclosures?

This graph plots the inventory of foreclosure homes for sale. Do you sense a foreclosure wave coming soon?

Inventory of foreclosure homes for sale

Foreclosures currently account for less than half of 1% of all homes for sale in the US, despite warnings from alarmists about an impending crisis. Consider this perspective they may have overlooked:

In 2009, the market saw nearly 2.5 million homes in foreclosure; today, that number has plummeted to below 300,000. While there are many aspects to scrutinize when evaluating the state of housing, mortgage foreclosures should not be a major concern unless there’s a significant downturn in the US economy.

The likelihood of a near-term surge in foreclosure activity remains low, as the volume of foreclosure starts is still nearly 40% below the levels seen before the pandemic. It appears that the primary motive behind the “foreclosure warning” videos is more about attracting views to clickbait channels than providing a factual assessment of the housing market’s health.

Are All Foreclosures … Foreclosures?

This graph displays foreclosure starts (when banks first file lis pendens) alongside foreclosure sales (when a property is sold at a foreclosure auction or sale). Analyzing the trends in starts and sales over time provides a clear understanding of the current conditions within the foreclosure market.

US Foreclosure starts and foreclosure sales

The term foreclosure is thrown around a lot, and many “reporters” you see online and on TV do not understand the difference between foreclosure starts and foreclosure sales.

Firing up the hype train on foreclosure starts is straightforward, but it’s crucial to remember that, historically, most foreclosure starts do not lead to a foreclosure sale. Typically, the homeowner manages to catch up on payments, sells the property to repay the loan, or opts for a short sale. During the 2008 housing market collapse, the situation escalated as government actions restricted lending, leading to an increase in foreclosure sales due to the diminished pool of new buyers caused by the scarcity of loan products.

The current scenario is markedly different—and in a positive way. Home values have significantly increased, providing most homeowners with substantial equity. If a homeowner falls behind on loan payments today, they can sell the home on the open market, repay the loan, and walk away with their equity, making the prospect of a foreclosure sale less likely.

Affordability Improves

For years, I’ve been alerting readers to the unfolding affordability crisis, so it’s with a sense of relief that I can now report a slight improvement in the situation over the past few months.

Relationship to what people make and how much they spend on their home

This graph plots the national payment-to-income ratio on new loans. It’s 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.

Despite a slight increase in mortgage rates recently, home affordability has improved in the last few months. To purchase a median-priced home with a 20% down payment on a 30-year fixed-rate loan, it now requires a monthly payment of $2,257. This represents a nearly 10% decrease (-$243) from the record high in October but an increase of $831 (+58%) from the beginning of 2022.

The average payment now constitutes 33.4% of the median household income, a decrease from the 38-year high of over 38% seen in October. However, it remains 9 percentage points higher than the 30-year average of 24.2% and is just below the 33.8% peak observed before the housing market downturn in 2006.

Inventory Deficit – The Real Estate US Housing Crisis

I have also highlighted the concern that insufficient homes are being built to accommodate the growing US population. We might be beginning to observe some minor relief in this area, albeit slightly.

Shortage of homes for sale across the US

The national shortfall in homes available for sale saw an adjusted improvement in December, dropping to -36%, marking its most favorable point since July 2020. This is a significant recovery from the lows of -51% last summer and -69% in early 2022. Although the number of new listings remains below pre-pandemic levels by -17%, this gap has lessened from as much as -31% in March.

Inventory levels have improved in 99% of major markets on an adjusted basis over the past six months. The most notable increases, ranging between 28-30%, occurred in Florida markets such as Lakeland, Tampa, Orlando, Cape Coral, North Port, and Palm Bay, along with Memphis and Colorado Springs, each seeing a +29 percentage point improvement, and Knoxville and San Jose, both at +25 percentage points.

13 of the Top 100 markets with the most significant inventory deficits are located in the Northeast, with Hartford leading at a deficit of -79%.

Inventory Is Still Below What’s Needed

If you’ve been a reader of the Tallahassee Real Estate Blog for a while, you’ll know that I consistently emphasize “supply and demand” as a critical lens through which to assess the health of the housing market. Today’s analysis is no exception.

This graph displays the months of inventory on the right axis, underscoring the ongoing issue: we have not constructed enough homes to accommodate the expanding US population.

Graph displaying the months of supply of homes for sale in the US

With the inventory starting in 2024 at a 36% deficit and demand, as gauged by purchase applications, showing a 38% deficit, the market is seemingly on the cusp of a shift towards more neutral pricing and a gradual increase in sales volumes. This adjustment is particularly anticipated as we progress into the spring buying season, traditionally a peak for real estate activity.

The current situation, although not yet aligned with the 5 to 6 months of inventory that define a balanced market, indicates a potential easing of the extreme conditions seen in recent years. As supply and demand move closer to equilibrium, we can expect a more stable market environment benefiting buyers and sellers.

Scaremongers Do Not Understand Equity In Housing

Historically, high equity levels act as a safeguard for mortgage investors against potential losses. Additionally, these levels lay the groundwork for a surge in equity lending, anticipated to occur once interest rates lower to a point where homeowners find equity withdrawals more enticing.

Mortgage holders’ equity levels rose by 11% in 2023

Mortgage holders concluded 2023 with a record $16 trillion in equity, marking a $1.6 trillion increase (+11%) from the previous year. Of this, $10.3 trillion is deemed “tappable,” accessible while keeping a combined loan-to-value (CLTV) ratio of 80% or lower, reflecting a $1.14 trillion rise (+12%) in 2023. The average mortgage holder now possesses $299K in equity, a growth from $274K at 2022’s end, with an average of $193K available for withdrawal, maintaining a 20% equity cushion in their home.

These historically high equity levels serve as a protective measure for mortgage investors against potential losses. Notably, two-thirds of all equity is owned by borrowers with mortgage rates below 4%, creating a disincentive for these individuals, especially those with substantial balances, to refinance their mortgages for equity access.

Similarly, an equivalent two-thirds of this equity is held by borrowers with credit scores of 760 or above, identifying a particularly low-risk group for lenders to focus on. The total market CLTV stands at 45.9%, showing an improvement from 47.2% the previous year, though it has increased from a record low of 42.6% in mid-2022.

Despite what the hypsters warn, the current state of equity in the housing market mitigates the immediate concern for a widespread foreclosure crisis.

Fewer Borrowers “Under Water” On Their Mortgages

The surge in home prices across most of the U.S. has led to very few homeowners finding themselves underwater on their mortgages. 

Very few homeowners are currently underwater on their homes

By the end of 2023, only 1.1% of mortgage holders (582,000) were underwater, a decrease from 1.5% (807,000) the previous year. The proportion of borrowers with less than 10% equity in their homes has remained stable at 5.3%, following a low of 2.2% at the height of home price increases in the second quarter of 2022.

For example, I always advise homebuyers that using a low or no-down-payment mortgage program, such as an FHA loan with a 3.5% down payment and 3% in closing costs, will put them nearly 7% underwater on their mortgage as soon as they move into their new home. Considering the historical real estate appreciation rate of less than 4% per year, I historically recommended preparing to pay money at closing if they decide to sell their home within the first three years of ownership.

Today, the slow pace at which homebuilders produce inventory has decreased the risk for buyers and lenders. For instance, in the Tallahassee real estate market, we’ve observed appreciation rates exceeding 10% over the past four years, offering protection to lenders and buyers.

Foreclosures – Fear Mongering For Clicks

Let’s close today’s report with one hard fact … there is no foreclosure wave in the foreseeable future!

Summary of US foreclosures 2023

The ICE-McDash team has my gratitude, as it gives us the numbers needed to squash the hype that is so prevalent online.

Here’s the real information you need to know about delinquencies and foreclosures:

  • Delinquent Loans fell 2.8% last year
  • Foreclosure sales fell 3.6% last year
  • Foreclosure starts fell 11% last year
  • Seriously-delinquent loans fell 22% last year

Somehow, with all this data available online, the hypsters continue to report a coming wave of foreclosures. Shame on them for using scare tactics to generate views, and congratulations to you for being smart enough to find the facts!

As we’ve journeyed through the intricate landscape of the housing market, dissecting delinquencies, foreclosures, and the equity that buffers many homeowners from disaster, it’s clear that the narrative isn’t as dire as some would have you believe. The data doesn’t just suggest stability; it screams it, offering a beacon of light in what many assumed was an impending darkness.

But knowledge, while powerful, is only as impactful as the actions it inspires. So, what’s next for you, the informed reader? First, if you’re a homeowner, take a moment to understand the equity you’ve built in your home and how it positions you in today’s market. If you’re considering buying, let this information be a tool in your decision-making process, understanding that the market, while always fluctuating, is not on the brink of collapse as some would suggest.

For those looking to sell, consider the equity you’ve accumulated and how it can be leveraged in your next steps. And for everyone else, stay informed, stay critical, and always look beyond the headlines.

The call to action is clear: Engage with the housing market from a place of knowledge and understanding. Whether you’re buying, selling, or simply observing, let the facts guide your perspective and your actions. And remember, in a world where sensationalism often clouds judgment, being informed is your greatest asset.

Don’t let fear-mongering dictate your financial decisions. Instead, arm yourself with knowledge, consult with professionals, and move forward with confidence. The future isn’t written in the stars; it’s shaped by the informed choices we make today. Let’s choose wisely, together.

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