Are the Foreclosure Fears Valid?

A Look at Today’s Housing Market vs. the 2008 Housing Crisis

 

News headlines have been riddled with reports of an increase in foreclosures, sparking concern that the real estate market might be on the verge of a crash.

They are not totally wrong. 

Foreclosures have been on the upswing. According to a recent report from ATTOM, foreclosures have seen a 2% increase quarter over quarter and an 8% increase year over year, drawing the attention of media outlets and fueling worry. However, it is essential to dive deeper into the data to understand the full picture and dispel any unfounded fears. Let’s examine the current state of the housing market and explore the factors that differentiate the present situation from the 2008 housing crash.

The Difference Between Today’s Housing Market and 2008’s

1. Government Involvement During COVID-era

The 2020-2021 foreclosure moratorium, coupled with various relief programs, played a significant role in preventing a surge in foreclosures during the COVID-19 pandemic. These initiatives aimed to offer borrowers financial support until they could get back on their feet after facing pandemic-related hardships. As a result, many homeowners with financial difficulties did struggle to make their payments. This, in a “normal” world, might have led to an increase in foreclosure activity. However, due to the government's actions, lenders were forbidden from foreclosing on borrowers who were facing financial hardship during the pandemic. They also required lenders to offer forbearance programs (aka - refraining from taking legal action to collect on a debt) and work with borrowers on repayment plans until they could get back on their feet. The moratorium combined with lenders' forbearance programs and record levels of equity caused foreclosure numbers to dive to record lows in 2020 and 2021.

2. Home Equity

Another crucial factor that has safeguarded homeowners from foreclosure is the significant amount of equity they hold in their properties. Due to rising property values and responsible financial decisions, many homeowners found themselves with a considerable amount of equity in their homes. As a result, when faced with financial challenges, these individuals were able to sell their homes rather than letting the bank take legal action to collect the debt (i.e., foreclosure), thus protecting their investments and credit standing. In contrast, during the 2008 crash, loose lending standards created the exact opposite environment where borrowers had limited equity, exotic loan structures, and limited equity in their homes. As a result, many wound up unable to sell their homes, which led to a huge wave of foreclosure properties flooding the market with supply. As most of us learned back in Economics 101 – when supply goes up and demand stays the same (or goes down), the value of the asset will go down.


A Look at the Data

So as the government's pandemic-era foreclosure moratorium came to an end, it was expected that foreclosure rates would rise. However, it's important to note that an increase in foreclosures does not necessarily imply a troubled housing market. Contrary to the sensationalized headlines, the situation today is significantly different from the housing crash of the past.

To illustrate the stark contrast between the current situation and the 2008 housing crash, we can examine data on foreclosure filings for each year since 2008. This comparison, as shown in the above chart, reveals a consistent decline in foreclosure activity post-crisis. While foreclosures may be climbing modestly today, they are still far below the record-high numbers witnessed during the housing market crash. 

Furthermore, they are climbing from record lows. So when a headline says that foreclosures are up 286% compared to 2021, they are not technically wrong. However, as you can see, the total number of foreclosures in 2023 is nothing like it was at the peak of the last housing crisis when foreclosure supply flooded the market and contributed to the downward spiral of housing prices. This is why we’re confident that an increasing number of foreclosures isn’t going to lead us to declining home prices the way it did circa 2008.

3. Higher standards for homeowners to qualify for lending

Another critical distinction between the past and the present is the increased qualification standards for homebuyers. Today's buyers are subject to stricter lending criteria, ensuring that they are more financially capable of repaying their loans. This factor, coupled with improved financial literacy and responsible borrowing habits, makes today's homeowners less likely to default on their mortgages.

Let’s Recap

So, while there has been a modest increase in foreclosures recently, it is essential to understand the context behind these numbers. 

To summarize:

  • The foreclosure moratorium and post-COVID-19 relief programs provided critical support to homeowners during challenging times, and high levels of home equity continue to act as a shield against foreclosure. 

  • Moreover, when comparing current foreclosure activity to the 2008 housing market crash, it becomes evident that the situation today is much more stable.

  • The real estate market is resilient, and while challenges may arise, it is far from a crisis. 

It is crucial for homebuyers, sellers, and investors not to be swayed by alarming headlines but to rely on data and expert analysis to make informed decisions. As long as responsible lending practices continue, and homeowners maintain their equity positions, the housing market remains on a solid foundation.

Always rooting for you and here to help keep you informed! 🤝

 
 

Brent Edwards (aka Brent the Broker) is a residential real estate agent and Realtor in San Diego, CA who helps clients buy and sell homes in San Diego, California and all surrounding areas. Brent is a highly-recommended Realtor in San Diego by family, friends and past clients. Call Brent today at 619-550-8070 if you have any questions about real estate in San Diego or you'd like to buy or sell a home.

 
 

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