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While you may have seen recent stories about the volume of foreclosures today, context is important. During the pandemic, many homeowners were able to pause their mortgage payments using the forbearance program. The goal was to help homeowners financially during the uncertainty created by the health crisis.

When the forbearance program began, many experts were concerned it would result in a wave of foreclosures coming to the market, as there was after the housing crash in 2008. Here’s a look at why the number of foreclosures we’re seeing today is nothing like the last time.

1. There Are Fewer Homeowners in Trouble

Today’s data shows that most homeowners are exiting their forbearance plan either fully caught up on payments or with a plan from the bank that restructured their loan in a way that allowed them to start making payments again. The graph below depicts those findings from the Mortgage Bankers Association (MBA):

What You Actually Need To Know About the Number of Foreclosures in Today’s Housing Market | MyKCM

The same MBA report mentioned above estimates there are approximately 525,000 homeowners who remain in forbearance today. Thankfully, those people still have the chance to work out a suitable repayment plan with the servicing company that represents their lender.

2. Most Homeowners Have Enough Equity To Sell Their Homes

For those who are exiting the forbearance program without a plan in place, many will have enough equity to sell their homes instead of facing foreclosures. Due to rapidly rising home prices over the last two years, the average homeowner has gained record amounts of equity in their home.

Marina Walsh, CMB, Vice President of Industry Analysis at MBA, says:

“Given the nation’s limited housing inventory and the variety of home retention and foreclosure alternatives on the table across various loan types, . . . Borrowers have more choices today to either stay in their homes or sell without resorting to a foreclosure.”

3. There Have Been Fewer Foreclosures over the Last Two Years

One of the seldom-reported benefits of the forbearance program was it gave homeowners facing difficulties an extra two years to get their finances in order and work out a plan with their lender. That helped prevent the foreclosures that normally would have come to the market had the new forbearance program not been available.

Even as people leave the forbearance program, there are still fewer foreclosures happening today than before the pandemic. That means, while there are more foreclosures now compared to last year (when foreclosures were paused), the number is still well below what the housing market has seen in a more typical year, like 2017-2019 (see graph below):

What You Actually Need To Know About the Number of Foreclosures in Today’s Housing Market | MyKCM

4. The Current Market Can Easily Absorb New Listings

When the foreclosures in 2008 hit the market, they added to the oversupply of houses that were already for sale. It’s exactly the opposite today. The latest Existing Home Sales Report from the National Association of Realtors (NAR) reveals:

“Total housing inventory at the end of March totaled 950,000 units, up 11.8% from February and down 9.5% from one year ago (1.05 million). Unsold inventory sits at a 2.0-month supply at the present sales pace, up from 1.7 months in February and down from 2.1 months in March 2021.”

A balanced market would have approximately a six-month supply of inventory. At 2.0 months, today’s housing market is severely understocked. Even if one million homes enter the market, there still won’t be enough inventory to meet the current demand.

Bottom Line

If you see headlines about the increasing number of foreclosures today, remember context is important. While it’s true the number of foreclosures is higher now than it was last year, foreclosures are still well below pre-pandemic years.

Let’s kick off this month discussing some of the biggest topics in real estate today.

is the market going to crash? what about home prices? affordability?

Are we in a housing bubble?

This shows home values going all the way back to World War II. And if you think about that, the reason we go back to World War II is that was the start of the modern day housing boom here in this country. If you think about GIs coming back from the war and the GI Bill provided for education, provided for them to go out and buy a home. And ever since then, up until today, there’s been one time in this country where homes lost significant value and that was back in 2008. So back in 2008 we saw homes lose value really for two reasons. First reason, loose lending standards. You think back then, no income, no job, no verification and we know how that ended up. The second reason was cash out refinances. People took the equity they had, cashed it out, bought jet skis and went on vacation, the financed lifestyle. Did things thinking this will never end and it ended poorly. So let’s recap there. Apply for a loan that you don’t have to qualify for and then you take your equity and you cash it out and that’s what ended up in 2008 when homes lost value.   http://www.econ.yale.edu/~shiller/data.htm

Let’s take a look at home values going all the way back to World War II – the start of the modern day housing boom in the United States. Notice that 2008 was the only time homes lost significant value, and this is really for two reasons. First, loose lending standards – lack of income verification, lack of job verification, etc. Second, cash out refinances – people took the equity they had, cashed it out, and bought depreciating assets. In these times people were able to apply for a loan they didn’t qualify for, and then borrow against the equity.

First, the forbearance numbers continue to edge downward. As of the most recent numbers in April, 690,000 loans still in forbearance, well below where we started out of May of 2020.  https://www.blackknightinc.com/blog-posts/forbearance-plans-edge-higher/?

All that said, this market is different. First, the forbearance numbers continue to edge downward. As of last month, there are 690,000 loans still in forbearance – well below where we started out in May of 2020. According to Black Knight, 92% of the people that entered forbearance have come out of it.

One of the latest statistics that’s come out is 92% of the people that entered forbearance have come out of it, according to Black Knight. And those that have come out, as of March 31st, here’s the clearest picture. Thirty-seven percent in the green area were paid in full. Those are the ones that took forbearance maybe as an insurance policy and said I don’t know what’s going to happen and they didn’t need it. Forty-four point six, the blue shaded area, went through some kind of work out with their bank, either a modification, a rate and term refinance or a deferral. They tacked it on the back. Four out of five people either went through a modification or paid it off in full and there were no issues. That’s a very, very positive sign. Now, there are 18% that are still in some sort of trouble. We don’t know. They have no loss mitigation plans or they’re already into the loss mitigation plan.  https://www.mba.org/news-research-and-resources/newsroom

Thirty-seven percent were paid in full – those that likely took forbearance as an insurance policy and didn’t need it. Forty-four percent went through some kind of modification, refinance, or deferral – tacking it on the back end. So, 4 out of 5 people exited forbearance – a very positive sign. However, there are 18% that are still in jeopardy – they have no loss mitigation plan or are already into the loss mitigation plan. But let’s not forget that people have options today – you can sell your home with the appreciation we’ve seen over the last couple of years.

We have learned from history that prices can fall. The more important question is if it’s going to happen right now. And that’s hard to say.   Danielle Hale, Chief Economist, realtor.com
Lending standards are nothing like they were in the early 2000s. We talked about the things that people had done that caused the crisis. Well, there’s two components that this report by the urban institute outlined. First, is produce risk in the mortgage business and second is borrower risk. product risk. Think about that as the types of loans that are available to people. And that’s been virtually eliminated. If you start back in1999, we’re talking about all the way to 2021. product risk is not there. The loans that were available back then are not available today. borrower risk. Think about that as asset profile, credit score, all the thing that it takes to qualify for a loan and those have been severely curtailed. It’s gotten harder to qualify for a loan after the housing crisis. That’s when the qualified mortgage came out and demonstrate the ability to repay, all the things that we know about the mortgage business about how hard it’s gotten to qualify. This graphic tells the story of the differences today between back then.   https://www.urban.org/policy-centers/housing-finance-policy-center/projects/housing-credit-availability-index

Second, the lending default risk is lower. The Urban Institute looked at Default Risk in the Mortgage Market and that helps us see how lending standards are nothing like they were in the early 2000s. There is product risk and borrower risk. The loans that were available back then are not available today. When looking at the borrower risk, think about asset profiles, credit scores – all of those things needed to qualify for a loan – have been curtailed. It’s gotten harder to qualify for a loan. Now we have to demonstrate the ability to repay.

the foreclosure market is an all-time low. Now, the last couple of years certainly there’s been a moratorium in place and the federal government has stepped in and said, look, we’re not going to process these foreclosures during the pandemic. [00:07:03) And those are coming back and we’ve talked about that on the monthly market report. But back during the housing crisis, over nine million people went through foreclosure.   https://www.attomdata.com/news/market-trends/foreclosures/attom-q1-2022-u-s-foreclosure-market-report/ https://www.attomdata.com/news/market-trends/foreclosures/attom-year-end-2021-u-s-foreclosure-market-report/

Third, the foreclosure market is an all-time low – from a high of about 3 million homes in foreclosure to 78,000 last quarter.

Tighter lending standards have led to less foreclosures in the market. Now, that makes a lot of sense, right? If you have a highly qualified or a better qualified borrower, you’re going to see less defaults and we’re seeing exactly that. That certainly is not going to play into a crash. If you needed a further example of that, this is a look at the loans that have been given to people with a credit score less than 620. So, again, go back to the housing crisis. So many loans – this is in volume in billons of loans with a credit score less than 620. And where do we stand as the third quarter of 2021, the most recent information from the Federal Reserve, a fraction of where we were back then. So we can clearly say lending standards are different. That story is different. One of the major contributors back in 2008 is not around.   https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/xls/HHD_C_Report_2021Q3.xlsx

Fourth, lending standards are tighter which can be attributed to less foreclosures in the market. Qualified buyers mean less defaults. During the crisis we saw about 4 times the amount of loans approved for individuals with a credit score less than 620.

The other question though a lot of people bring up is well, as homes get expensive, as homes have risen, people aren’t going to be able to support that debt and that’s a challenge. Well, mortgage debt is not a challenge. Again, this is from the Federal Reserve. This is the household debt service ratio for mortgages and that’s as a percentage of disposal personal income.  https://fred.stlouisfed.org/series/MDSP

Fifth, mortgage debt is not a challenge. According to the Federal Reserve, the household debt ratio is the lowest it has been since the 1970s. Why? Because of rising wages. Today, we are much better positioned than we were back in the financial crisis.

Finally, cash out refinances are extremely low. The difference in annual mortgage payments for cash out refinances was over $3,000 and $4,000 back during the housing crisis, while we hover around the $34 mark right now. There is very little change in the mortgage payment as somebody goes through a cash out refinance.

We learned a lot of lessons during the housing crash, and can see how the market dynamics are very different today. So, what is to come in the remainder of 2022? The Fed started off the month by raising the Fed funds rate. How will this affect home prices?

MBA: https://www.mba.org/docs/default-source/research-and-forecasts/forecasts/mortgage-finance-forecast-apr-2022.pdf NAR: https://cdn.nar.realtor/sites/default/files/documents/forecast-q2-2022-us-economic-outlook-04-27-2022.pdf Fannie Mae: https://www.fanniemae.com/media/43346/display Freddie Mac: https://www.freddiemac.com/research/forecast/20220418-quarterly-forecast-purchase-market-will-remain-solid-even-mortgage-rates-rise HPES: https://pulsenomics.com/surveys/#home-price-expectations CoreLogic: https://www.corelogic.com/intelligence/u-s-home-price-insights/            Zelman: https://www.zelmanassociates.com/

Looking at the most recent updated home price forecast from the top seven forecasters, we see 9% appreciation for 2022.

The most recent updated home price forecast from the seven forecasters that we watch, these are for 2022 prices, average of these forecasters is 9% appreciation. Many people are saying are homes going to lose value later in the year? Certainly not what experts are saying for this year. If you see these experts, they start to fall between 8 and 10%. We started off the year at about 5% appreciation and we’ve risen slowly each month since then. We said these forecasters had a bias to the upside, meaning they were raising their forecast and we’re certainly seeing that today.   https://pulsenomics.com/surveys/#home-price-expectations

Beyond 2022, we will see a much more normal rate of appreciation like the pre-pandemic rate of 3.8%.

What the home price expectation survey does as well is they look at cumulative house of price appreciation by 2026. If we look at these, they sort of rank them by the optimist, the pessimist, and then the average of all panelists in the middle. Optimists say 46.5% appreciation. Pessimists, 10% appreciation. All the panelists, 26% appreciation by 2026. So, depending on where you sit, I think even if you’re a pessimist in this market, they’re calling for appreciation here between now and 2026.   https://pulsenomics.com/surveys/#home-price-expectations

The home price expectation survey forecasts 26% cumulative home price appreciation by 2026.

... the 30-year fixed mortgage will likely peak at between 5.0% and 5.7%. There is some variability in the relationship, so we might see rates as high as the low 6% range.  Bill McBride, Author, Calculated Risk

As buyers search for homes, we’ve seen interest rates in the first four months of this year rise dramatically. We started the year about 3.1%, and now we’re just over 5.25% on the average 30 year fixed.

New data from the Harris Poll show 84% of Americans plan to cut back spending as a result of price spikes… More than 70% of respondents said they’re feeling the effects of inflation the most in gas prices and groceries.   Bloomberg

Prices are rising all around us, and that is affecting affordability.

Looking at the change in mortgage payment going back to January of 2021. This is based on a loan amount of $300,000 principle and interest only. But if you look at January of 2021, mortgage rates were at historic lows. A typical mortgage payment was about $1,200, a little north of that. Fast-forward to where we are today in this rising mortgage rate environment, and things are different. If we think about where mortgage rates are projected to go and let’s say mortgage rates later this year are around 5.5% as we look at what the experts are saying and what’s projected to happen, that mortgage payment jumps up to over $1,700. if you’re talking about $1,200 to $1,700, that’s roughly a $500 difference.   https://www.freddiemac.com/pmms https://www.mortgagecalculator.net/

Consider a loan amount of $300,000 (principle and interest only). In January 2021, your monthly payment would have been about $1,200. Fast forward to today’s rates, and you are looking at about $1,650 a month for the same home. Projections have this payment increasing by about $500 within the next few months.

The Housing Affordability Index. It goes all the way back to 1990. And if you follow along with us, you’ve definitely seen this before, but really had to break this down and look at it. Is that the higher the bar, the more affordable homes are. If you look at where we are over on the right today at 135.4, that’s the index that NAR is measuring here. Homes are not as affordable as they were over the past 10 or 12 years, and certainly not as affordable as they were in those orange bars, which was the housing crisis. That’s when distressed properties dominated the market. Homes are being sold at a massive discount. We’re certainly not there but as we’ve seen prices rise, mortgage rates rise, homes are not as affordable as they were even over the past couple of years. It’s important to remember that affordability is really a measure of three key things. We mentioned prices and mortgage rates, but it’s also wages. Right now, all three of those things are ticking up but historically, over the past couple of years, mortgage rates have kind of offset some of the rising prices. Well, we’re not sitting in that seat anymore so people are feeling affordability challenges.   https://www.nar.realtor/blogs/economists-outlook/ https://www.nar.realtor/blogs/economists-outlook/housing-affordability-declines-in-february

The Housing Affordability Index shows that homes are more affordable than any time leading up to the housing crisis. So, when people say homes aren’t affordable anymore, we have to ask, “As compared to when?”

It’s truly hard to believe that it was two years ago that a worldwide pandemic fundamentally changed the world. The housing market was certainly not immune to that. Let’s take some time to answer some of those burning questions about the real estate market.

what's going on with the housing market? price appreciation? supply and demand? home prices? what are the benefits of owning?

Prior to the pandemic, a normal year of home price appreciation was about 3.8%. Corelogic reported this number at 6% in 2020. Really significant. Then last year, we saw more than double the home price appreciation in 2020. Incredible home price appreciation over the past two years. Why? Mostly because of supply and demand – there are more buyers in the market than homes available.

Price Appreciation Is Accelerating % Year-Over-Year Price Increases by Month  Jan 2021 @ 10 Peaking at 19.1 in jan 2022 https://www.corelogic.com/intelligence/u-s-home-price-insights/

Home prices are still accelerating. The most important thing to understand when we hear the experts predict home price “deceleration” is that this means homes will continue to appreciate, but at a slower, more moderate rate. Deceleration does NOT equal depreciation.

Home Price Forecasts for 2022 Average of all experts 6.1%   https://www.mba.org/news-research-and-resources/research-and-economics/forecasts-and-commentary https://cdn.nar.realtor/sites/default/files/documents/forecast-Q1-2022-us-economic-outlook-01-27-2022.pdf https://www.fanniemae.com/research-and-insights/forecast http://www.freddiemac.com/research/forecast/20220121_quarterly_economic_forecast.page https://pulsenomics.com/surveys/#home-price-expectations https://www.corelogic.com/intelligence/find-stories/corelogic-hpi-posted-record-year-over-year-growth-in-2021/

The average of the 7 expert forecasts for home price appreciation in 2022 is 6.1%. The reality is that if we continue to see low inventory, we will likely see these forecasts trend upward. Six to seven months inventory on the market is the perfect balance of supply and demand. Less inventory is a seller’s market, and more inventory is a buyer’s market.

Tallahaseee new listings: Date New Listings Jan-21 489 Feb-21 507 Mar-21 690 Apr-21 691 May-21 733 Jun-21 749 Jul-21 741 Aug-21 687 Sep-21 578 Oct-21 569 Nov-21 437 Dec-21 395 Jan-22 438  2021https://www.realtor.com/research/data/

New listings in Tallahassee seem to be failing pretty significantly over the past year. With 77% of consumers (according to a recent realtor.com study) feeling like their market is in a housing bubble, it is important now, more than ever, to be informed. So… let’s tackle that perspective.

Inventory of Homes Nothing Like Last Time Months Supply of Existing Homes for Sale in December of Each Year 2007 9.6 2008 9.4  2009 7.3 2010 8.5 2018 3.7 2019 3 2020 1.9  2021 1.8 nar.realtor https://www.nar.realtor/topics/existing-home-sales

Inventory of homes today is nothing like the last time. It was a buyer’s market in the years leading up to the housing crash – we had an oversupply of homes. Today, we are seeing record lows. Inventory is in a totally different place today, and the demand is more than the market can handle.

I want to share this data here that shows, you know, credit scores are nothing like the last time either. This is the volume of loans in billions, with a credit score less than 620. So take a look at those orange bars, 2003 to 2007. Significantly more loans issued to buyers who had a credit score less than 620, than we are now, where we are now. So 2008 to 2021, you can see that those lending standards have gotten much tighter. Meaning that buyers are essentially showing the credentials that they’ll be able to afford their home, and that’s what’s leading to the loan opportunities. So very different lending standards are creating a landscape that’s nothing like the last time. Credit scores are definitely tighter this time around.  https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/xls/HHD_C_Report_2021Q3.xlsx

Credit scores are nothing like the last time either, and were, quite frankly, one of the leading causes of the housing bubble. Between 2003 and 2007, significantly more loans were issued to buyers who had a credit score less than 620. Since then, lending standards have gotten much tighter.

38.1 percent of homeowners exiting the forbearance plan are paid in full. So they’ve made their monthly payments or they’ve paid off their loan. They’ve done something to bring their payments current and they’re in a great place, they’re walking away no issue. Now, 43.7 percent are workouts or repayment plans. This is the game-changing section, this is the section we didn’t have the last time around when the housing bubble burst, because these are the homeowners who have been able to make a modification, a loan deferral, to go back to their bank and work with their bank or their lender to change their situation and stay in their homes. This is huge and what we’ve been saying over time is this section is getting a little bit bigger than the green section and that’s because more and more people have been able to go back and work out an alternate plan. That is massive. Now, the percentage of homeowners that are still in trouble are in the orange section, 18.2 percent, but what this does mean is that these homeowners are exiting the plan without a loss mitigation plan, but on the safe side, what we know from Black Knight is that 93 percent of homeowners in the forbearance plan have at least 10 percent equity. So when you have that equity, you also have the opportunity to potentially sell your home rather than go into forbearance. So people sitting in this situation, you know 10 percent is kind of that tipping point of you could sell your house, you could pay off your fees, you could you know maybe even walk away with a little cash in your pocket if you sell your home, and so FEBRUARY 2022 KCM – FEBRUARY 2022 6 of 7 that gives someone a different opportunity than going into forbearance. We have a very strong equity situation across the country right now, enabling that opportunity. https://www.mba.org/news-research-and-resources/newsroom https://www.mba.org/2022-press-releases/january/share-of-mortgage-loans-in-forbearance-decreases-to-141-percent-in-december-2021

Homeowners have significantly more equity today, so they’re in a much better financial situation. In addition, forbearance helped homeowners to the point in which we will not see a wave of foreclosures come to the market.

These are all the wonderful reasons we are not in a housing bubble.

For a $200,000 home at 3.5% interest rate today your monthly payment would be $898. However, in Q1 of 2023 when that same home will be $212,600, interest rates will be $3.8%, and now your monthly payment is $990. That’s a difference of $33,314 over the life of the 30-year mortgage. That’s staggering.

Let’s wrap up this month by touching on net worth and the long-term financial benefits of owning a home. In addition to stability, there is a sense of financial security in homeownership. According to the National Association of Realtors®, the average net worth of a homeowner today is $300,000, while the average net worth of a renter is $8,000. That’s staggering. Again, homes will continue to appreciate in value, allowing buyer’s to take advantage of that equity gain.

While the booming housing market contributed significantly to the recovery of   the U.S. economy, research has consistently shown that homeownership is also associated with multiple economic and social benefits to individual homeowners. Homeownership has always been an important way to build wealth.  National Association of Realtors®

Bottom Line

Home prices are still accelerating, and may continue rising as a direct result of supply and demand. The market data simply does not support that we are in a housing bubble. Despite the rising prices, it is still a good time to buy, since homes are not predicted to depreciate, only appreciate at a slower, more moderate rate.

Tallahassee Market Statistics

recent survey revealed that many consumers believe there’s a housing bubble beginning to form. That feeling is understandable, as year-over-year home price appreciation is still in the double digits. However, this market is very different than it was during the housing crash 15 years ago. Here are four key reasons why today is nothing like the last time.

1. Houses Are Not Unaffordable Like They Were During the Housing Boom

The affordability formula has three components: the price of the home, wages earned by the purchaser, and the mortgage rate available at the time. Conventional lending standards say a purchaser should not spend more than 28% of their gross income on their mortgage payment.

Fifteen years ago, prices were high, wages were low, and mortgage rates were over 6%. Today, prices are still high. Wages, however, have increased, and the mortgage rate, even after the recent spike, is still well below 6%. That means the average purchaser today pays less of their monthly income toward their mortgage payment than they did back then.

In the latest Affordability Report by ATTOM Data, Chief Product Officer Todd Teta addresses that exact point:

“The average wage earner can still afford the typical home across the U.S., but the financial comfort zone continues shrinking as home prices keep soaring and mortgage rates tick upward.”

Affordability isn’t as strong as it was last year, but it’s much better than it was during the boom. Here’s a chart showing that difference:

4 Simple Graphs Showing Why This Is Not a Housing Bubble | MyKCM

If costs were so prohibitive, how did so many homes sell during the housing boom?

2. Mortgage Standards Were Much More Relaxed During the Boom

During the housing bubble, it was much easier to get a mortgage than it is today. As an example, let’s review the number of mortgages granted to purchasers with credit scores under 620. According to credit.org, a credit score between 550-619 is considered poor. In defining those with a score below 620, they explain:

“Credit agencies consider consumers with credit delinquencies, account rejections, and little credit history as subprime borrowers due to their high credit risk.”

Buyers can still qualify for a mortgage with a credit score that low, but they’re considered riskier borrowers. Here’s a graph showing the mortgage volume issued to purchasers with a credit score less than 620 during the housing boom, and the subsequent volume in the 14 years since.

4 Simple Graphs Showing Why This Is Not a Housing Bubble | MyKCM

Mortgage standards are nothing like they were the last time. Purchasers that acquired a mortgage over the last decade are much more qualified. Let’s take a look at what that means going forward.

3. The Foreclosure Situation Is Nothing Like It Was During the Crash

The most obvious difference is the number of homeowners that were facing foreclosure after the housing bubble burst. The Federal Reserve issues a report showing the number of consumers with a new foreclosure notice. Here are the numbers during the crash compared to today:

4 Simple Graphs Showing Why This Is Not a Housing Bubble | MyKCM

There’s no doubt the 2020 and 2021 numbers are impacted by the forbearance program, which was created to help homeowners facing uncertainty during the pandemic. However, there are fewer than 800,000 homeowners left in the program today, and most of those will be able to work out a repayment plan with their banks.

Rick Sharga, Executive Vice President of RealtyTracexplains:

“The fact that foreclosure starts declined despite hundreds of thousands of borrowers exiting the CARES Act mortgage forbearance program over the last few months is very encouraging. It suggests that the ‘forbearance equals foreclosure’ narrative was incorrect.”

Why are there so few foreclosures now? Today, homeowners are equity rich, not tapped out.

In the run-up to the housing bubble, some homeowners were using their homes as personal ATM machines. Many immediately withdrew their equity once it built up. When home values began to fall, some homeowners found themselves in a negative equity situation where the amount they owed on their mortgage was greater than the value of their home. Some of those households decided to walk away from their homes, and that led to a rash of distressed property listings (foreclosures and short sales), which sold at huge discounts, thus lowering the value of other homes in the area.

Homeowners, however, have learned their lessons. Prices have risen nicely over the last few years, leading to over 40% of homes in the country having more than 50% equity. But owners have not been tapping into it like the last time, as evidenced by the fact that national tappable equity has increased to a record $9.9 trillion. With the average home equity now standing at $300,000, what happened last time won’t happen today.

As the latest Homeowner Equity Insights report from CoreLogic explains:

“Not only have equity gains helped homeowners more seamlessly transition out of forbearance and avoid a distressed sale, but they’ve also enabled many to continue building their wealth.”

There will be nowhere near the same number of foreclosures as we saw during the crash. So, what does that mean for the housing market?

4. We Don’t Have a Surplus of Homes on the Market – We Have a Shortage

The supply of inventory needed to sustain a normal real estate market is approximately six months. Anything more than that is an overabundance and will causes prices to depreciate. Anything less than that is a shortage and will lead to continued price appreciation. As the next graph shows, there were too many homes for sale from 2007 to 2010 (many of which were short sales and foreclosures), and that caused prices to tumble. Today, there’s a shortage of inventory, which is causing the acceleration in home values to continue.

4 Simple Graphs Showing Why This Is Not a Housing Bubble | MyKCM

Inventory is nothing like the last time. Prices are rising because there’s a healthy demand for homeownership at the same time there’s a shortage of homes for sale.

If you’re worried that we’re making the same mistakes that led to the housing crash, the graphs above show data and insights to help alleviate your concerns.

Real estate is one of the time-honored inflation hedges. It's a tangible asset,   and those tend to hold their value when inflation reigns, unlike paper assets.   More specifically, as prices rise, so do property values.  Mark P. Cussen, Financial Writer, Investopedia

With homeownership you can lock in the cost today, and have an asset that increases in value over time, making it a great hedge against inflation.

Homeownership: A Hedge Against Inflation where home prices appreciate at a greater rate than inflation. 2021 at 18% appreciation and 6.8% inflation 2020 at 2021 at 9.2% appreciation and 1.4% inflation 2010s at 4.9% appreciation and 1.8% inflation 2000s at 2.3% appreciation and 2.6% inflation 1990 at 4% appreciation and 3% inflation 1980s at 5.5% appreciation and 5.6% inflation 1970s at 9.9% appreciation and 7.1% inflation  https://cdn.nar.realtor/sites/default/files/documents/2021-11-12-residential-economic-issues-and-trends-lawrence-yun-presentation-slides-11-12-2021.pdf https://www.bls.gov/news.release/archives/cpi_01132021.pdf https://www.corelogic.com/intelligence/find-stories/home-prices-topple-expectations-surging-at-the-end-of-2020/

When looking at home price appreciation versus consumer price increases gong back to the 1970s, we can see how home price appreciation outpaces inflation. Of course, the 2000s was a fundamentally different housing market with an oversupply of homes and lower lending standards. Overall, we can see that buying a home today would not only lock in today’s costs and provide a hedge against inflation, but avoid the rising rental rates.

A fixed-rate mortgage allows you to maintain the biggest portion of housing expenses at the same payment. Sure, property taxes will rise and other expenses may creep up, but your monthly housing payment remains the same. That’s certainly not the case if you’re renting.  James Royal, Senior Wealth Management Reporter, Bankrate

Rental prices are skyrocketing, and the forecasts project that not only will home values will continue rising, but so will mortgage rates.

Rent Increase Greater Than InflationMost Years looking at Rental Price Appreciation and Core Inflation Rate from 1973 – 2020  https://ipropertymanagement.com/research/average-rent-by-year https://www.usinflationcalculator.com/inflation/united-states-core-inflation-rates/

Rent increases have been greater than inflation in most years. That means it’s more expensive to rent over time.

For a $200,000 home at 3.5% interest rate today your monthly payment would be $898. However, in Q1 of 2023 when that same home will be $212,600, interest rates will be $3.8%, and now your monthly payment is $990. That’s a difference of $33,314 over the life of the 30-year mortgage. That’s staggering.

For a $200,000 home at 3.5% interest rate today your monthly payment would be $898. However, in Q1 of 2023 when that same home will be $212,600, interest rates will be $3.8%, and now your monthly payment is $990. That’s a difference of $33,314 over the life of the 30-year mortgage. That amount jumps to $66,625 for a $400,000 home.

For a $200,000 home at 3.5% interest rate today your monthly payment would be $898. However, in Q1 of 2023 when that same home will be $212,600, interest rates will be $3.8%, and now your monthly payment is $990. That’s a difference of $33,314 over the life of the 30-year mortgage. That amount jumps to $66,625 for a $400,000 home.

For a $200,000 home at 3.5% interest rate today your monthly payment would be $898. However, in Q1 of 2023 when that same home will be $212,600, interest rates will be $3.8%, and now your monthly payment is $990. That’s a difference of $33,314 over the life of the 30-year mortgage. That amount jumps to $66,625 for a $400,000 home. That’s staggering.

Homeowners are shielded from mounting rental prices because their cost is fixed, regardless of what’s happening in the market. . . . Tangible assets like real estate get more valuable over time, which makes buying a home a good way to spend your money during inflationary times. Natalie Campisi, Advisor Staff, Forbes

Tangible assets like real estate get more valuable over time making buying a home a good way to spend your money during inflationary times.

Every quarter, Pulsenomics surveys a distinguished panel of over 100 economists, investment strategists, and housing market analysts regarding their 5-year expectations for future home prices in the United States. I think this gives you a real clear picture of where home prices are projected to head according to the experts. Now the Home Price Expectation Survey is a survey of 100 economists, data analysts, people who are projecting out home price appreciation, and in the fourth quarter of last year this is the projection for cumulative house appreciation by 2026. So what are you looking at? They divided out the group into optimists and pessimists, optimists being the ones projecting the most appreciation over the next appreciation over the next five years and pessimists estimating on the lower side. So take a look at that orange bar, those are the pessimists, you know the experts that are saying home price appreciation on the lower side, cumulatively, by 2026 it’s going to be over 23 percent. So as experts look forward, the conditions of the market, what’s projected to happen? Home values are expected to increase in value over time, even on the lower end, 23 percent, 23.7 is pretty significant over the next five years, so locking in today’s cost is mission critical for those who have the opportunity to do so, to protect themselves in their largest monthly payment because as we know, with home prices rising, mortgage rates rising, inflation all around us, it’s going to get more expensive to purchase a home.  https://pulsenomics.com/surveys/#home-price-expectations

This is the Home Price Expectation Survey of 100 economists and data analysts from Q4 of 2021, and represents their house appreciation forecasts by 2026. The group was divided into optimists and pessimists, where optimists projecting the most appreciation over the next 5 years, and the pessimists estimate on the lower end. The pessimists are saying that by 2026 houses will appreciate in value by over 23%. That is pretty significant.  

Mortgage rates remain unchanged from last week. The economy lost momentum in January, leaving mortgage rates unchanged from last week and relatively flat for a third consecutive week. This stagnation reflects the economic impact of the Omicron variant of COVID-19, which we believe will subside in the coming months. As economic recovery continues going into the spring and summer, mortgage rates are expected to resume their upward trajectory. In the meantime, recent data suggests that homebuyer demand continues to be elevated as supply remains low, driving higher home prices. Sam Khater, VP and Chief Economist, Freddie Mac
So if we look at this rise in rates, we’re at about 3.55 percent, this graphic goes back to the beginning of 2020 and we’re starting to get back in the area, we’re back in the area of where we started when the pandemic came on us in March of 2020. Just to put that in perspective. The Fed comes in and acts, the influence. They don’t control mortgage rates but they influence the rates down and now we’re back, coming back up. Certainly a sign that we can all hope for, that the economy is improving, that we’re getting through this and we’re moving ahead, that would be my word for it. If you take a little bit larger look, if you go back to the beginning of 2018, which is what this graphic shows on the average 30-year fixed, and sort of make this line of 3.55 percent, you can see where we sit there, right? Certainly we’re higher back in 2018 and ‘19 started to come down and certainly dropped to historic lows during the pandemic and we’re starting to come back out of that. You know perspective on that, again from Freddie Mac, “As mortgage rates rise, we do expect some moderation in housing demand, causing house price growth to temper. However, the combination of a large number of entry level homebuyers facing a shortage of entry level inventory of homes for sale should keep the housing market competitive.” No doubt we’ll see a housing market that is competitive this year.  http://www.freddiemac.com/pmms/pmms_archives.html

We’ve recently seen a rise in mortgage rates. Some of the last reported numbers have us around 3.55%, which is certainly higher than in some past years, but the housing market is expected to remain pretty competitive this year. It’s about to start feeling like interest rates are going to be high, but they are historically low for the U.S.

As mortgage rates rise, we do expect some moderation in housing demand, causing house price growth to temper. However, the combination of a large number of entry level homebuyers facing a shortage of entry level inventory of homes for sale should keep the housing market competitive... In 2022, we expect purchase originations to grow from 1.9 trillion in 2021 to 2.1 trillion in 2022, while refinance activity is anticipated to decrease, from 2.7 trillion in 2021 to 1.2 trillion in 2022. Freddie Mac

Let’s look at two of the mortgage markets – the purchase market and the refinance market. The purchase market is forecasted to grow, and the refinance market is forecasted to constrict – a typical reaction in a rising rate environment.

This is a look at the 10-year treasury, going back to the beginning of December, just two months ago, and what do we know? During that time, the rate on the 10-year treasury yield has skyrocketed, knowing on the door right now, of 2 percent https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart

Let’s tie in the 10-year treasury for a moment. In the last 2 months, the rate on the 10-year treasury yield has skyrocketed. Why is that important?

 . For the last 50 years, the relationship between the mortgage rate and the 10-year treasury yield has been almost symbiotic, okay? Wherever the 10-year treasury yield goes, there goes the 30-year fixed rate, okay? The Fed and the Fed raising rates does not control interest rates, it can only hope to influence it. What we want to watch is the 10-year treasury yield. https://ycharts.com/indicators/10_year_treasury_rate www.freddiemac.com

For the last 50 years, the relationship between the mortgage rate and the 10-year treasury yield has been almost symbiotic. Wherever the 10-year treasury yield goes, there goes the 30-year fixed rate. The Fed does not control interest rates – it can only hope to influence them. Overall, the 10-year treasury yield may be something worth watching.

Mortgage rates hit their highest levels since March 2020, leading to the slowest pace of refinance activity in over two years.    Joel Kan, Associate VP of Economic and Industry Forecasting, MBA

Month after month we have talked about why we will not see a wave of foreclosures coming to the market, so let’s wrap up this month looking at the latest data.

Loans in forbearance have fallen below one million. This is massive. We’re at roughly 780,000 loans in forbearance today and that equates to only about 1.4 percent of mortgages. If you think about where we started, over there in the red bars on the left, there were nearly five million homes in the forbearance plan in May of 2020 and we’re down to about 780,000. So huge progress and just one more way that shows that the forbearance program has really helped homeowners change their situations, stay in their homes and really be in a better place than they would have been in such a time of economic uncertainty, and this is vastly different than what we saw in 2008.  https://www.blackknightinc.com/blog-posts/

Loans in forbearance have fallen below one million. This is huge. We are at roughly 780,000 loans in forbearance which equates to 1.4% of mortgages. It is wonderful to see that the forbearance program has really helped homeowners change their situations during such a time of economic uncertainty.

As the COVID-19 pandemic continues to create uncertainty in the global economy, the overwhelming majority (89%) of single-family homeowners who sought financial assistance through COVID-related mortgage payment forbearance plans have exited those plans. Andy Walden, VP of Market Research, Black Knight Data
38.1 percent of homeowners exiting the forbearance plan are paid in full. So they’ve made their monthly payments or they’ve paid off their loan. They’ve done something to bring their payments current and they’re in a great place, they’re walking away no issue. Now, 43.7 percent are workouts or repayment plans. This is the game-changing section, this is the section we didn’t have the last time around when the housing bubble burst, because these are the homeowners who have been able to make a modification, a loan deferral, to go back to their bank and work with their bank or their lender to change their situation and stay in their homes. This is huge and what we’ve been saying over time is this section is getting a little bit bigger than the green section and that’s because more and more people have been able to go back and work out an alternate plan. That is massive. Now, the percentage of homeowners that are still in trouble are in the orange section, 18.2 percent, but what this does mean is that these homeowners are exiting the plan without a loss mitigation plan, but on the safe side, what we know from Black Knight is that 93 percent of homeowners in the forbearance plan have at least 10 percent equity. So when you have that equity, you also have the opportunity to potentially sell your home rather than go into forbearance. So people sitting in this situation, you know 10 percent is kind of that tipping point of you could sell your house, you could pay off your fees, you could you know maybe even walk away with a little cash in your pocket if you sell your home, and so FEBRUARY 2022 KCM – FEBRUARY 2022 6 of 7 that gives someone a different opportunity than going into forbearance. We have a very strong equity situation across the country right now, enabling that opportunity.  https://www.mba.org/news-research-and-resources/newsroom https://www.mba.org/2022-press-releases/january/share-of-mortgage-loans-in-forbearance-decreases-to-141-percent-in-december-2021

Looking at loans upon exiting the forbearance program, about 38% percent of homeowners are paid in full by either making monthly payments or paying off their loan. Then, about 44% percent are on some sort of repayment plan – homeowners who have been able to make a loan modification or deferral. Unfortunately, 18.2% of homeowners are exiting the forbearance plan without a loss mitigation plan. The bright side of that is, according to Black Knight, 93% of homeowners in a forbearance plan have at least 10% equity, allowing them the opportunity to sell their home. To put this all in perspective, during the housing bubble burst in 2008, we saw 9.3 million homes go into foreclosure. We are in a very different situation today.

What this says here is that 422,360 fewer foreclosures over the last year. So we have significantly fewer foreclosures today than we would even in a normal year. 2017, 2018 and 2019. The number of foreclosures we had in those normal years leading up to the pandemic averaged just under 300,000, and so the unfortunate reality is that in this country, every year there are homeowners who do go into the foreclosure process. You know they have a job loss or a challenging financial situation, something happens where homeowners have to give their homes back to their bank or their lender. In 2017 through 2019 that number averaged out to about 290,000. Now if you look at 2020 and 2021, these were not normal years. This is where the forbearance program came into play and there were far fewer foreclosures in each of those years. So if you look at the red bar under 2020, there were 120,000 foreclosures in 2020, that was short 161,000 of what would be normal. 2021 through the third quarter is what we have data for right now, 29,000, so massively short. So that’s where that 422,360 number comes from and contextually, if you think about that, that is incredibly low. In fact it is so low, I think this next graph really shows it well, foreclosure activity is actually at an all-time low. \ https://www.newyorkfed.org/microeconomics/hhdc.html

We have significantly fewer foreclosures today than we would even in a normal year. Obviously, the forbearance program came allowed us to see record low foreclosures in the most recent years.

So, look at 2021. Where we are so far, there are 151,000 foreclosure filings. Now we never want any one home owner to go through the foreclosure process, we certainly don’t want that to happen. We believe in homeownership and the value that the brings everyone, but if you put this into context and you look at 2007 to 2015, millions of homeowners were going into the foreclosure process, and that is vastly different from where we are today. I mean even in this number of 151,000, if it doubles, if it triples, if it quadruples, keeps going, we’re nowhere near where we were when the housing bubble burst, and this is massively impactful, showing that the fundamentals of today’s market are just very, very different today.  https://www.attomdata.com/news/market-trends/foreclosures/attom-year-end-2021-u-s-foreclosure-market-report/

Foreclosure activity is at an all-time low. We are at 151,000 foreclosures, whereas in 2007 to 2015, millions of homeowners were going into the foreclosure process. Even if this number of 151,000 doubled, tripled, or even quadrupled, we would be nowhere near where we were when the housing bubble burst.

We may see a little bit of an uptick in foreclosure rates in 2022. Just an uptick though, from an extraordinarily low level, we’re not expecting to see a big increase... We expect delinquency rates overall on home mortgages to actually continue to remain quite, quite low. Maiclaire Bolton-Smith, Senior Leader of Research, CoreLogic
405 closed sales, $273,382 average sales price, 1069 active inventory, 570 new listings, 383 pending sales

When mortgage forbearance plans were first announced and the pandemic surged through the country in early 2020, many homeowners were allowed to pause their mortgage payments. Some analysts were concerned that once the forbearance program ended, the housing market would experience a wave of foreclosures like what happened after the housing bubble 15 years ago.

Here’s a look at why that isn’t the case.

1. There Are Fewer Homeowners in Trouble This Time

After the last housing crash, over nine million households lost their homes to a foreclosure, short sale, or because they gave it back to the bank. Many believed millions of homeowners would face the same fate again this time.

However, today’s data shows that most homeowners exited their forbearance plan either fully caught up on payments or with a plan from the bank that restructured their loan in a way that allowed them to start making payments again. The latest data from the Mortgage Bankers Association (MBA) studies how people exited the forbearance program from June 2020 to November 2021.

Here are those findings:

38.6% left the program paid in full
44% negotiated work-out repayment plans
0.6% sold as a short sale or did a deed-in-lieu
16.8% left the program still in trouble and without a loss mitigation plan in place

2. Those Left in the Program Can Still Negotiate a Repayment Plan

As of last Friday, the total number of mortgages still in forbearance stood at 890,000. Those who remain in forbearance still have the chance to work out a suitable plan with the servicing company that represents their lender. And the servicing companies are under pressure to do just that by both federal and state agencies.

Rick Sharga, Executive Vice President at RealtyTrac, says in a recent tweet:

“The [Consumer Financial Protection Bureau] and state [Attorneys General] look like they’re adopting a ‘zero tolerance’ approach to mortgage servicing enforcement. Likely that this will limit #foreclosure activity for a good part of 2022, while servicers explore all possible loss [mitigation] options.”

For more information, read the warning issued by the Attorney General of New York State.

3. Most Homeowners Have More Than Enough Equity To Sell Their Homes

For those who can’t negotiate a solution and the 16.8% who left the forbearance program without a work-out, many will have enough equity to sell their homes and leave the closing with cash instead of facing foreclosures.

Due to rapidly rising home prices over the last two years, the average homeowner has gained record amounts of equity in their home. As Frank Martell, President & CEO of CoreLogic, explains:

“Not only have equity gains helped homeowners more seamlessly transition out of forbearance and avoid a distressed sale, but they’ve also enabled many to continue building their wealth.”

4. There Have Been Far Fewer Foreclosures Over the Last Two Years

One of the seldom-reported benefits of the forbearance program was that it allowed households experiencing financial difficulties prior to the pandemic to enter the program. It gave those homeowners an extra two years to get their finances in order and work out a plan with their lender. That prevented over 400,000 foreclosures that normally would have come to the market had the new forbearance program not been available. Otherwise, the real estate market would have had to absorb those foreclosures. Here’s a graph depicting this data:

There Won’t Be a Wave of Foreclosures in the Housing Market | MyKCM

5. The Current Market Can Easily Absorb Over a Million New Listings

When foreclosures hit the market in 2008, they added to the oversupply of houses that were already for sale. That resulted in over a nine-month supply of listings, and anything over a six-month supply can cause prices to depreciate.

It’s exactly the opposite today. The latest Existing Home Sales Report from the National Association of Realtors (NAR) reveals:

“Total housing inventory at the end of November amounted to 1.11 million units, down 9.8% from October and down 13.3% from one year ago (1.28 million). Unsold inventory sits at a 2.1-month supply at the current sales pace, a decline from both the prior month and from one year ago.”

A balanced market would have approximately a six-month supply of inventory. At 2.1 months, the market is severely understocked. Even if one million homes enter the market, there still won’t be enough inventory to meet the current demand.

The end of the forbearance plan will not cause any upheaval in the housing market. Sharga puts it best:

“The fact that foreclosure starts declined despite hundreds of thousands of borrowers exiting the CARES Act mortgage forbearance program over the last few months is very encouraging. It suggests that the ‘forbearance equals foreclosure’ narrative was incorrect. . . .”

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