Foreclosures have jumped 70%. Here’s what that says about the housing market

Foreclosures are up, and that’s something potential homebuyers and investors should take note of. Indeed, according to a report from mortgage data and analytics company Black Knight, in January there was a seven-fold increase in foreclosure starts as compared to December, with roughly 33,000 loans referred to foreclosure. What’s more, data from real estate data analytics firm ATTOM Data Solutions revealed that lenders repossessed 2,634 U.S. properties through completed foreclosures in February 2022, which is an increase of 70% from last year (though it’s still down 45% from last month). 

What do these foreclosures say about the housing market?

Realtor.com senior economist George Ratiu says the uptick in foreclosures during January is an early signal that many of the regulatory protections implemented during the pandemic to help Amercans stay in their homes are starting to wear off. Indeed, millions of people got mortgage forbearances during the pandemic that put their mortgage payments on hold. “Most of them got back on their feet and ended their forbearances in 2020 and 2021.

The people who remained in forbearances into 2022 might be more likely to be suffering permanent financial hardships. When their forbearances end, they’re less likely to be able to resume their payments and more likely to end up in foreclosure,” says Holden Lewis, home and mortgage expert at NerdWallet. What’s more, for many, the forbearance period is scheduled to come to a close soon and there is a backlog of loans who are either in loss mitigation or past due even after coming out of mitigation which may still enter foreclosure in the months ahead,” says Ratiu. 

The foreclosure uptick “also indicates that the economic, and especially employment recovery, is not complete. We lost 20.2 million jobs in April 2020 alone as the government imposed wide-ranging lockdowns and since then, the economy has added 18.8 million jobs back, but we’re still short of the pre-pandemic level,” says Ratiu. 

That said, “the silver lining for housing markets and homeowners is that January’s foreclosure rate remains 40% below the value registered before the pandemic,” says Ratiu. In fact, pros say, the housing market is still going strong, thanks in part to mortgage interest rates that are still near record lows. “With demand for homes exceeding supply by so much, no one is going to get a foreclosure for a steal. Competing buyers are bidding up prices for all homes, including foreclosures,” says Lewis.

Should I buy a foreclosure?

While no one wants to gain from another’s misfortune, you may come across foreclosed properties in your search for a home. Here’s what you need to know about potentially buying one.

First, it’s important to understand the different types of foreclosures listed for sale. “Many real estate investors are looking for a deep foreclosure bargain, but it’s still a seller’s market,” says Lawrence Yun, chief economist at the National Association of Realtors.

Depending on the stage of the delinquency process, you may find pre-foreclosures where a lender notifies the homeowner that they’re in default; short-sales where a homeowner tries to sell the home for less than the mortgage value due to financial distress; sheriff’s sale auction where properties in default are sold at courthouses, bank foreclosures known as real estate owned (REO) properties, and government foreclosures where properties are purchased with loans from the Federal Housing Finance Agency or Veterans Administration.

Properties in foreclosure can be found on the multiple listing service (MLS). “Properties going through foreclosures are also listed in newspapers, bank offices and websites. For buyers considering a foreclosed property, auctions are another venue to find available houses,” says Ratiu. 

But, in today’s market, where a shortage of homes for sale keeps prices elevated, buyers may not necessarily find a steal when looking at foreclosed properties. “Banks who own REO homes have an incentive to sell them quickly, but they are aware of market prices and also vested in recouping the value from the home. For buyers considering a foreclosed property, it’s important to get through an inspection to determine the physical condition of the home. Obtain an estimate for the cost of repairs, which should also determine the offer price they may want to make,” says Ratiu.