Why a Wave of Foreclosures Is Not on the Way

With forbearance plans coming to an end, many are concerned that the housing market will see a wave of foreclosures like what occurred after the housing bubble burst 15 years ago. Here are a few reasons why that isn’t going to happen.

There Are Fewer Homeowners in Danger of Foreclosure This Time

Following the previous housing crash, approximately 9.3 million households lost their homes due to foreclosure, short sale, or simply giving it back to the bank.

When stay-at-home orders were issued early last year, there was concern that the pandemic would have a similar impact on the housing industry. Many predicted that up to 30% of all mortgage holders would participate in the forbearance program. Only 8.5 percent did, and that figure has now dropped to 2.2 percent.

The total number of mortgages still in forbearance as of last Friday was 1,221,000. That is far fewer than the 9.3 million households that were left just over a decade ago.

Most Mortgages in Forbearance Have Enough Equity to Sell Their Homes

Because of rapidly rising home prices over the last two years, 93 percent of the 1.22 million homeowners currently in forbearance have at least 10% equity in their homes. This 10% equity is significant because it allows homeowners to sell their homes and pay the associated expenses rather than facing the credit hit that could be caused by a foreclosure or short sale.

The remaining 7% may not be able to sell, but if the entire 7% of those 1.22 million homes went into foreclosure, it would total approximately 85,400 mortgages. To put that figure in context, here are the annual foreclosure figures for the three years preceding 2020:

  • 2017: 314,220
  • 2018: 279,040
  • 2019: 277,520

The number of foreclosures that are likely to result from the forbearance program will be far less than the number of foreclosures that impacted the housing crash 15 years ago. In fact, it is less than one-third of any of the three years preceding the pandemic.

The Current Market is Too Strong for Mass Foreclosures

Why a Wave of Foreclosures Is Not on the Way | MyKCM

When foreclosures first appeared in 2008, there was an oversupply of properties on the market Today, however, the situation is exactly the opposite. There was more than a nine-month supply of listings on the market in 2008. That number is now less than a three-month supply. Here’s a graph that illustrates the difference between the two markets.

Bottom Line

The data indicates why Ivy Zelman, founder of the major housing market analytical firm Zelman and Associates, was on point when she stated:

“The likelihood of us having a foreclosure crisis again is about zero percent.”