Foreclosures creating ripples, but not waves 

With the economy expected to face choppy waters in 2023, distressed property activity will be a rising tide — but not a tsunami.

That's the forecast of two experts on foreclosure activity, speaking in a Feb. 15 webinar hosted by the Asian Real Estate Association of America.

Rick Sharga of the consulting firm CJ Patrick Company and Daren Blomquist of Auction.com both pointed to the Covid-19 foreclosure moratorium programs followed by a strong jobs market as key factors in keeping residential distressed property activity well below pre-pandemic levels. 

"At the moment, delinquency rates tend to be very, very positive," said Sharga, adding that he doesn't expect distressed property activity to return to 2019 levels until later this year. The distressed property levels in 2019 were also below historical averages.

How many properties might fall into distressed territory will depend largely on what happens in the economy overall. Blomquist noted that losing a job is a common event that leads to home foreclosures. If the unemployment rate starts rising from its current level of 3.4%, it could mean more foreclosures. 

Blomquist and Sharga are also watching for "deferred distress," the idea that some properties might have become distressed without the pandemic-era foreclosure moratoriums. While they estimate the federal programs probably prevented around three million foreclosures, there will still be some properties that could soon be at risk of foreclosure now that the moratoriums have been lifted.

There's some evidence that is already starting to happen. Real estate data company ATTOM released its January 2023 U.S. Foreclosure Market Report on Feb. 9, which found foreclosure filings were up 36% year-over-year and up 2% from December.

"The uptick in overall foreclosure filings nationwide points toward a trend that may suggest more increased activity is on the horizon as we enter the new year," said ATTOM CEO Rob Barber in reference to the report. "While both completed foreclosures and foreclosure starts have stalled slightly over the past month, the annual increase in overall activity seen over the past 21 months may indicate a more substantial trend that could continue into 2023."

Equity may prevent a wave of foreclosures

Blomquist said he is also seeing some signs of consumer distress, which combined with a slowing economy and the potential drop in home prices, could create some longer-term problems for property owners.

But because many homeowners have a significant amount of equity in their homes, they may be less affected, even if the economy falls into a recession.

"In my mind it is more of a rising tide, it's not a wave or tsunami," Blomquist said.

Blomquist is forecasting completed foreclosure auctions this year to be around half the number of auctions completed in 2019. In the next couple of years, Blomquist said foreclosures could rise if the economy ends up in a recession — but they still wouldn't come close to approaching the 2008-2010 levels given the amount of homeowner equity. 

Still, equity isn't a cure-all. Sharga pointed out that a third of people in foreclosure now have 20-50% equity in their homes. "So equity doesn't prevent somebody from entering into foreclosure, but it gives those borrowers the option of being able to sell their house and avoid losing all that equity to a foreclosure rather than see the property auctioned off," Sharga said.

Sharga's advice to agents who want to get involved with the distressed property market is to look upstream. That means working with the homeowners who have equity and can sell their property rather than losing it to a foreclosure sale. 

"Waiting for those REO assets to trickle in as listings will probably be a longer wait than usual. [We're] probably not going to see huge numbers of those this year," Sharga said.