While the housing market is slowing in 2022 and will likely continue in 2023, there is a consensus that there will not be a foreclosure wave. This is good as a homeowner who are sitting on record home equity. A 2008 type scenario is highly unlikely to develop in this market. Homeowner equity will allow many sellers to add to their net worth and avoid a drastic crash in real estate prices. According to Mark Fleming, Chief Economist at First American:
“. . . don’t expect a housing bust like the mid-2000s, as lending standards in this housing cycle have been much tighter and homeowners have historically high levels of home equity, so there likely won’t be a surge in foreclosures.”
According to more data from Mortgage Bankers Association, MBA, offers an insight into this story. This shows the overall percentage of homeowners and their risk of foreclosures. As we can see, mortgage forbearance and foreclosure odds are trending towards historically low levels. Remember, homeowners locked in record low rates, that are now lower than some savings account percent returns.
While there still remains homeowner equity risks as every investment carries risks, real estate seems to hold up. Even though there is a low number of at-risk homeowners, there is still a small percentage of people who will be foreclosed on. For those facing difficulties paying their mortgages, there are a few options to understand. It is important to understand what a foreclosure is before we get into how to avoid one. According to Investopedia, a foreclosure is:
“Typically, default is triggered when a borrower misses a specific number of monthly payments . . . Foreclosure is the legal process by which a lender attempts to recover the amount owed on a defaulted loan by taking ownership of and selling the mortgaged property.”
Good News For Homeowner Equity
The good news? There are alternatives available that will help a homeowner avoid the process of foreclosure. Some of these options that can help avoid foreclosure are:
- Loan modification
- Deed-in-lieu of foreclosure
- Short sale
But remember, before you go down any road to save your foreclosure, you should see if you have enough homeowner equity to sell and protect your investment.
Homeowner Equity Trends
For those who do not know and haven’t read our previous articles, homeowner equity is the difference between what is owed and what has been paid off, and add price appreciation. As a home’s price appreciates, you also gain homeowner equity. This makes what you owe less than what the home is worth, meaning when you sell you collect the difference.
In today’s real estate market, homeowner equity is at an all time high. Homeowners benefited from the drastic run-up in real estate prices that we saw due to the pandemic. Home price appreciation was accelerating at a record rate over the past 3 years. That trend looks to finally be slowing. According to CoreLogic,
“The total average equity per borrower has now reached almost $300,000, the highest in the data series.”
What This Means For Owners
For those who have lived in your house for at least a few years, you will be surprised by just how much equity you gained. The value of real estate has risen drastically. Even with the first decline in home prices in over a decade happening last month, real estate prices remain elevated. The current value of your home is likely double-digit percentage points higher than your purchase price. This is true in many markets, including Louisville, Kentucky’s real estate market.
According to Rick Sharga, Executive VP of Market Intelligence at ATTOM,
“Very few of the properties entering the foreclosure process have reverted to the lender at the end of the foreclosure. . . We believe that this may be an indication that borrowers are leveraging their equity and selling their homes rather than risking the loss of their equity in a foreclosure auction.
So, a wave of foreclosures is likely not to happen anytime soon. Experts believe that homeowners and homebuyers alike are in a better place than 2008. Lending standards, market trends, and more, are the reasons that we are unlikely to see another 2008 financial crisis, at least in real estate.