Will there be another tsunami of foreclosures in 2023? What opportunities are there for agents to help the 250,000 borrowers who are in default on their mortgages? Is fix-and-flip still a viable model, or has it evolved into a different approach? Here’s what to expect in each of these areas in 2023.
I recently interviewed Rick Sharga, the executive vice president for market intelligence for Attom Data, about his predictions about general trends, foreclosures, and what is happening in the “fix and flip” market.
Attom Data has been tracking foreclosure data since 1996. As a result, Sharga often gets asked if we should expect another foreclosure tsunami in 2023 like the one we experienced during the Great Recession. According to Sharga, there’s good news:
There’s virtually no chance we’re going to see that kind of foreclosure activity again. Before the pandemic, foreclosure activity was running a little low compared to historical numbers. That was largely because of changes in lending practices that were put in place back in 2010 as part of the Dodd Frank Act, including the Qualified Mortgage Rules and the Ability to Repay Rule.
Sharga said these changes have resulted in borrowers being eminently more qualified than in the past. Loan performance has also been extraordinarily strong, causing foreclosure activity to drop from the typical 1 percent level of about 550,000 loans (based upon 55 million U.S. mortgages) to about 250,000 loans.
Two additional programs that dramatically reduced the number of foreclosures were the “foreclosure moratorium” as well as the forbearance programs. Sharga explained that during the almost two years the foreclosure moratorium was in effect:
The only foreclosures we saw were on commercial loans and on vacant and abandoned properties.
In addition, the forbearance programs allowed homeowners to call their mortgage servicer and say their income had been impacted by the pandemic. This allowed borrowers to postpone their mortgage payments for up to two years.
About 8.3 million borrowers took advantage of that program. There are only about 300,000 left in the program. There would be even fewer, except we had some people from Florida raise their hand after the hurricane last month. The bottom line is, it’s been an incredibly successful program and it probably prevented 3 million to 4 million unnecessary foreclosures from happening.
As we exit those government programs, we see foreclosure activity running now at about 50 percent of where it was in 2019. We could double (that number) and still not be back to normal levels of foreclosures. So, there’s really no big foreclosure tsunami building up.
Sharga also says there’s another major difference in the foreclosure market today as compared to the Great Recession:
Ninety-three percent of the borrowers who are in foreclosure today have positive equity in their homes. That’s completely the opposite of where we were back in 2008, where one-third of all borrowers were underwater. While foreclosure starts are edging up, we’re not seeing very many bank repossessions. (Instead), these borrowers in distress are executing a soft landing. They’re finding a way to sell their home before the foreclosure auction at a profit and getting a fresh start.
The ones that get to auction are selling through at about a 70 percent rate, which is about twice the normal level. Investors are going to those auctions and gobbling up these properties. So, between fewer properties getting to auction, fewer properties getting past the auction, there’s just far fewer properties for the lenders to repossess.
If you’re an agent looking for REO inventory, if you’re an investor looking to buy bank-owned homes, there’s just not nearly as much of that inventory. I think that’s going to be true throughout the rest of this foreclosure cycle.
In my opinion, there’s a huge opportunity for agents to search RealtyTrac.com or Foreclosure.com to find properties that currently have a Notice of Default and to assist those homeowners in selling their homes before they lose them in foreclosure.
Sharga said Attom’s data is pretty much in alignment with what NAR and other outlets are reporting. According to Freddie Mac, we have never before experienced the doubling of mortgage rates in a single calendar year. The result has been that affordability has taken a major hit and there has been a significant decline in the number of transactions.
Prices have declined for the last four months on a month-over-month basis, although they’re still up on a year-over-year basis. In 2021, we had between 6.1 million to 6.2 million sales. For 2022, we’re probably looking at 5.0 million to 5.1 million sales. For 2023, we’re predicting sales in the 4.8 million to 4.9 million range. A lot of it depends on what happens with home prices.
Nevertheless, Sharga was optimistic:
Mortgage rates may have already peaked since they have plateaued or even declined in some cases. It looks like the Fed is starting to get inflation under control and to act less aggressively on raising the Fed funds rate. I expect mortgage rates will eventually work their way down back into the fives in 2023 and that we could see a recovery in the housing market as early as the middle of 2023.
Sharga argues that we will see a seller’s market, but nothing like what we experienced over the last few years.
The lack of inventory coupled with demographically driven demand is going to help keep home prices from just cratering, so that’s actually a good thing. The builders have pulled back on housing starts significantly since the market turned. That’s actually not a bad thing either, because one of the problems during the Great Recession was builders overbuilt. During the crash from 2005 to 2007, we had a 13-month supply of homes.
He went on to say that the builders aren’t going to rush back into the market until the buyers come back. In addition:
Since 70 percent of homeowners have mortgage rates at four percent or less, they are probably going to be reluctant to sell for a while and take on a higher interest rate. I do think as the market recovers, it will move a little bit back toward a seller’s market, but not as fully back as it was in the early part of 2022 or in 2021. You’re not going to have 30 people bidding on your house when you put it on the market. You need to be realistic on your price.
Attom Data has been doing a quarterly “Fix and Flip” report for quite some time because they believe investors are an important part of the real estate ecosystem:
These fix-and-flip investors are the ones who are bringing inventory to market that previously wasn’t available for your traditional home buyer. Our third quarter “Fix and Flip” report is a classic good news, bad news sort of report. The good news from a flipping perspective is that in terms of the number of properties flipped, it was the third highest quarter in the 22 years we have been tracking that data. About 92,000 properties were flipped during that quarter.
The bad news is the numbers have trended down. This quarter is the second consecutive quarter they’ve gone down. And more telling, we saw both the gross profits from flippers, and the profit margins, suffer a bit.
Sharga went on to warn those who watch the flipping shows and decide they’re going to make a fortune flipping properties, that the current market can be brutal. Profits can quickly be eaten up by declining appreciation and/or price declines, high material and labor costs, supply chain problems, and increased days on the market.
Moreover, most flippers obtain bridge loans for 12 months to 18 months. At the beginning of 2022, those loans were at 7 percent to 9 percent. Today they’re ranging from 10 percent to 12 percent plus points. That’s a pretty meaningful difference in terms of financing costs.
You really have to sharpen your pencil and do your math exceptionally well in order to make sure you don’t get into a deal that doesn’t pencil out and may cause you to lose money in the transaction.
I think experienced flippers are not (necessarily) in a bad place because there’s still demand from people that would like to buy a house. In fact, one of the trends we’re seeing in some reports as well as hearing about anecdotally is that as many as 20 percent to 25 percent of prospective homebuyers today have opted to rent instead because of affordability concerns. It stands to reason that if somebody was interested in buying a house, they might be interested in renting one rather than renting an apartment.
So, I do think there’s going to be some opportunities for real estate investors to buy properties, fix them up, and convert them into rentals. Also, rent prices for single family units have held up a little better this year than what we’ve seen in apartments.
Sharga’s final take on the 2023 market is that it’s going to be another tough year for housing, but not as dire as some of the forecasts we’re seeing.
Whether you’re a Realtor or a homeowner, market conditions in 2023 are going to vary wildly across the country. As a result, a one-size-fits-all approach to real estate or investing just isn’t going to work this year. Plan on adjusting your marketing to fit the unique conditions that are taking place in your local market.
Bernice Ross, president and CEO of BrokerageUP and RealEstateC