Is There a Flood of Inventory Coming from Foreclosures?

Recently, I was involved in a conversation and saw a few articles where people were talking about the prediction that foreclosures are going to be coming, and that is where the housing market inventory is going to come from. So, I wanted to share my thoughts about this – let’s dig into it.

What are the Numbers Showing?

The most recent report, considered the gold standard of foreclosure data, comes from the Mortgage Bankers Association (MBA). They looked at data that is a little older (from Q4 last year). It was interesting because foreclosures ticked up a little, particualy for VA and FHA loans. The year-over-year data was up by 10 basis points or one-tenth of 1% for pre-foreclosure and delinquencies.

But the actual foreclosure number was up by 1 basis point, which is one-one-hundredth of 1%. So, foreclosures are really holding steady, although we do need to keep an eye on FHA and VA loans because they allow a much higher loan-to-value ratio. Also, many people are carrying a higher debt-to-income ratio. They are also a little more lenient with credit scores. All of this feels like a little bit of a deadly combination.

For what it’s worth, VA still has a very low default rate. But there are other things to consider. Obviously, interest rates have been persistently high, so it will be interesting to see what would happen if rates came down. If people could refinance, then it would probably turn these numbers right around.

Foreclosures are Pretty Stable Right now

Overall, we have a pretty stable default/foreclosure rate happening. Currently, .15% is the foreclosure rate, which is extremely low historically – much lower compared to anything we saw pre-COVID.

I think there are some things that we need to watch out for, such as a big uptick in unemployment. Also, if rates continue staying high and people can’t refinance, then it could impact some people who are sitting high in debt-to-income ratios – that is also a problem.

For now, is there a flood of foreclosures coming that are going to help the inventory? The simple answer is: no.

Even if the numbers are ticking up a little bit, it’s such a small change and not having a significant impact on the market. Of course, we will see what happens in the future. We never know how the economy is going to change. My advice: don’t believe the haters, because real estate is probably going to hang in there!