How will rising foreclosures impact the U.S. housing market? To give his answer, Windermere Chief Economist Matthew Gardner sheds light on the latest foreclosure data and shows how prepared home buyers are to manage their mortgage debt today compared to the 2000s.
This video on foreclosures is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market.
Rising U.S. Foreclosures
The market has certainly shifted since mortgage rates started skyrocketing last year and, with prices pulling back across much of the country, some have started to become concerned about the likelihood of foreclosures rising—clearly a timely topic given current circumstances.
Hello there! I’m Windermere Real Estate’s Chief Economist Matthew Gardner and for this month’s episode of Monday with Matthew, I pulled the latest data on foreclosure starts and looked and the quality of mortgages that have been given to buyers in order to give you a clear idea of how foreclosures will impact the overall housing market.
For the purposes of this exercise, I’m going to concentrate on foreclosure starts rather than foreclosure filings because data shows us that a majority of homeowners where a foreclosure filing has been submitted to a court by their lender are able to avoid it by refinancing or selling the home, which makes total sense as over 93% of owners in the U.S. have positive equity.
U.S. Foreclosures: Starts 2007-2022
As you can see here, foreclosure starts rose significantly last year. In fact, they were 181% higher than in 2021. But if we zoom out, it’s important to note that foreclosure starts were 31% lower than 2019 and 88% lower than the 2009 peak.
Am I surprised at the increase in foreclosure starts? Not really. The forbearance program was put in place at the start of the pandemic, and it allowed homeowners to temporarily stop making mortgage payments and not be foreclosed on, but that program ended 18 months ago.
And, although a vast majority of the 4.7 million households who entered the program have left it and sold or refinanced their homes, there were always going to be some who were not able to, and this has led to the overall foreclosure activity rising. Let’s take a closer look.
U.S. Foreclosures in 2022
This is a heat map of foreclosure starts by state. And you can see that California, Florida, and Texas saw the highest numbers in 2022. But remember that these are the states that have the greatest number of homes with mortgages so, statistically, we would expect the total number of homes in foreclosure in those states would be higher than the rest of the country. That said, foreclosure starts were significantly higher in Florida, California, Texas, and New York than they were in 2019, the last “pre-COVID” year and before the forbearance program started.
And when we look more myopically, metro areas including New York/New Jersey, Washington DC, the Delaware Valley, Atlanta, Miami, Baltimore, and Dallas all saw total foreclosure starts rise well above what they were in 2019. This may suggest that there are some markets that could see foreclosure activity rise to a level that could materially impact housing in those locations.
But looking at the country as a whole, there are other factors leading me to believe that we will not see the number of homes entering foreclosure rising above the long-term average, and certainly not sufficient to have a material impact on U.S. housing prices.
Let me show you what’s happening on the mortgage side of things. First: credit quality.
Median FICO Scores for New Mortgages 2003-2022
The median FICO score for new mortgages was 766 in the 4th quarter of 2022. Yes, this is down from the peak seen in early 2021 when it was a whopping 788 but as shown here, it’s far higher than we saw before the housing crisis. Buyers over the past several years had very good credit and, given the tight labor market, we are certainly in a very different place than back before the housing bubble burst.
Mortgage Debt Payments Percentages 2007-2022
Secondly, buyers are using larger down payments than in the mid-2000’s, and with the historically low mortgage rates that we saw during the first two years of the pandemic benefitting new buyers as well as allowing existing homeowners to refinance, the share of disposable income that is used to cover mortgage payments remains very low. This basically means that owners aren’t as burdened by their house payments as they were in 2007-2009. And finally…
Equity Rich Households Q4 2022
With the significant run-up in housing values that we have seen over the past few years, 48% of all homeowners with a mortgage have more than 50% equity. Although this share has pulled back a little as mortgage rates rose and values pulled back, it’s still a massive amount of money and, as I mentioned earlier, many homeowners who are faced with foreclosure will end up selling their homes as they still have positive equity rather than go through the foreclosure process.
So, my answer to those of you wondering if we will see foreclosures rise to a level that could impact the overall housing market is “no.”
I don’t see any reason to believe that distressed sales will hurt the market in general, but I will say that there are some local markets where distressed sales could rise to levels that could act as a headwind to price growth in these areas. As always, I’d love to get your thoughts on this topic so please comment below! Until next month, take care and I will see you all soon. Bye now.
To see the latest housing data for your area, visit our quarterly Market Updates page.
About Matthew Gardner
As Chief Economist for Windermere Real Estate, Matthew Gardner is responsible for analyzing and interpreting economic data and its impact on the real estate market on both a local and national level. Matthew has over 30 years of professional experience both in the U.S. and U.K.
In addition to his day-to-day responsibilities, Matthew sits on the Washington State Governors Council of Economic Advisors; chairs the Board of Trustees at the Washington Center for Real Estate Research at the University of Washington; and is an Advisory Board Member at the Runstad Center for Real Estate Studies at the University of Washington where he also lectures in real estate economics.
You’ve got several options to choose from when buying your next home. With existing homes, it’s in sellers’ best interest to spruce up their properties, so they’ll usually complete some kind of upgrades, curb appeal projects, and remodeling before hitting the market. A new construction home, however, has no previous owner; it comes brand new. Learning about the new construction buying process will help you understand how it differs from other types of housing, such as existing single-family homes, townhouses, condominiums, etc.
What is a new construction home?
New construction homes are kick-started from two primary sources: the homeowners themselves and developers. When a homeowner is having a home custom built, they work with contractors to build it to their desired specifications on a lot they’ve purchased. This tailored approach comes at a price; building a custom home generally costs more than purchasing a new build from a developer.
When going the developer route, buyers have options to choose from, namely tract homes and spec homes.
Tract homes make up new neighborhoods on land bought by the builder. They bear a strong resemblance to each other but may offer customizable floor plan and design options to tailor the home to the buyer’s liking.
Spec homes are finished, move-in-ready new builds. Though they offer little to no customization, they may be the right option for you if you’re looking to move right away.
There are four component parts of building a new construction home: land, labor, materials, and regulation. Builders combine those costs to determine what price they need to sell the home to make a profit, accounting for local real estate market trends. However, if the market is driving up those costs, builders are less likely to continue building. As a buyer, keeping tabs on the housing market will help you understand the landscape of available new construction homes.
Pros of a New Construction Home
- New materials, appliances, and fixtures
- Customization without having to remodel
- Less maintenance than an older home
Cons of a New Construction Home
- Custom home costs can be high
- Move-in date dictated by builder’s timeline
- Market conditions can drive up prices/halt production
Buying a New Construction Home
The financial preparations you’d take for purchasing an existing home apply to buying a new construction home. You’ll get pre-approved for a mortgage early on and form a saving strategy for how to make a down payment.
There’s less room for negotiation in new construction home transactions, so you and your agent should thoroughly discuss what kind of offer you’re able to make. Your agent is your greatest asset during this part of the process; lean on them to understand how to make an offer. You’ll also want to know whether a home warranty comes with the purchase of the new construction home and its cost structure.
Even though these homes are brand new, it’s still worth it to get a home inspection to discover any outstanding repairs that need to be made and begin a dialogue with the builder about fixing them before you move in.
Going into the buying process, it helps to know which new construction homes you’re able to afford. This allows you and your agent to work together to find the best candidate properties. To get an idea of what’s affordable, use our free Home Monthly Payment Calculator by clicking the button below. With current rates based on national averages and customizable mortgage terms, you can experiment with different down payment amounts to get estimates of your monthly payment for any listing price.
Featured Image Source: Getty Images – Image Credit: Kirk Fisher
Image Source: Getty Images – Image Credit: jhorrocks
Pros of a New Construction Home
- New materials, appliances, and fixtures
- Customization without having to remodel
- Less maintenance than an older home
Cons of a New Construction Home
- Custom home costs can be high
- Move-in date dictated by builder’s timeline
- Market conditions can drive up prices/halt production
Buying a New Construction Home
The financial preparations you’d take for purchasing an existing home apply to buying a new construction home. You’ll get pre-approved for a mortgage early on and form a saving strategy for how to make a down payment.
There’s less room for negotiation in new construction home transactions, so you and your agent should thoroughly discuss what kind of offer you’re able to make. Your agent is your greatest asset during this part of the process; lean on them to understand how to make an offer. You’ll also want to know whether a home warranty comes with the purchase of the new construction home and its cost structure.
Even though these homes are brand new, it’s still worth it to get a home inspection to discover any outstanding repairs that need to be made and begin a dialogue with the builder about fixing them before you move in.
Going into the buying process, it helps to know which new construction homes you’re able to afford. This allows you and your agent to work together to find the best candidate properties. To get an idea of what’s affordable, use our free Home Monthly Payment Calculator by clicking the button below. With current rates based on national averages and customizable mortgage terms, you can experiment with different down payment amounts to get estimates of your monthly payment for any listing price.
Featured Image Source: Getty Images – Image Credit: Kirk Fisher
This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market.
Renting vs. Buying a Home
One of my followers asked me about some of the financial benefits of owning your home as opposed to renting. I find this topic interesting as there really is a “laundry list” of reasons that, from a financial standpoint, owning a home is better than renting.
I’m Matthew Gardner Chief Economist at Windermere Real Estate and welcome to this month’s episode of Monday with Matthew. Let’s get to the topic at hand. Of course, I don’t have time to go through them all today but here are the ones that I think are the most compelling: wealth building and tax benefits.
The Financial Benefits of Homeownership
The first thing to understand is that, over time, a mortgage becomes easier to afford. You see, when you buy a home, the mortgage payments themselves don’t change and, over time, your earnings rise but the mortgage payment doesn’t. Simply put, unlike renters who generally see their rents going up every year, your mortgage payment never will and because you’ll hopefully be making more money as time goes by, the share of your income that you spend on a mortgage payment becomes less & less.
The next advantage to owning your home is that it is a good long-term investment. Of course, some will say that this is not the case because we went through the housing bubble bursting back in 2006 but there have actually been very few times in history when home prices have seen any long-term downward adjustment.
Now I know some will say that investing in stocks would give you a higher long-term return. My response to that would be I’ve never seen anyone living under a stock certificate. Have you?
My next reason for believing that ownership is better than renting is rather simple, and that is because a portion of every mortgage payment you make goes toward reducing the principal amount of the loan. Of course, during a majority of the term of the mortgage most of the payment is going towards interest but, a small portion is paying down the debt itself—in essence making it a forced savings plan, building wealth along the way.
Tax Advantages of Owning a Home
But what about the tax advantages? Owning a home offers unique and substantial ways to save on your taxes every year. Firstly, you can deduct your real estate taxes every year. Now, tax reform has limited the total allowed deduction, but it is still meaningful. You can also deduct the interest you pay on your mortgage. Again, there are some limitations but, depending on where you live you could save a significant amount.
And finally, let’s talk Capital Gains Taxes. When you sell your primary residence and have seen its value grow since you purchased it, up to $250,000 of that profit (if you’re a single person) or $500,000 if you’re married and filing jointly is tax free. Now, this is only true if you meet certain requirements with the biggest one being that you have to have lived in the house for a minimum of two years during the preceding five-year period.
If that’s not enough to convince you that there are very significant advantages to owning a home over renting, I will leave you with one last datapoint that you may find of interest.
Renting vs. Owning a Home: Household Net Worth
Using Federal Reserve data as a base, I’ve been able to calculate the median net worth of a household in America who owned their homes versus a household that rents.
- In 2022, the median household wealth of a homeowner household here in America was approximately $330,000.
- The median household wealth for a renter household in this country last year was just $8,000.
As you can see, that’s quite the discrepancy between the two. I think it’s very clear that homeownership for a vast majority of families is how they create most of their wealth.
I hope you found this topic of interest. Of course, if you have any questions or comments please do let me know as I do enjoy hearing from you. Take care and I look forward to talking to you all again next month.
Data combined and calculated by Windermere Economics
About Matthew Gardner
As Chief Economist for Windermere Real Estate, Matthew Gardner is responsible for analyzing and interpreting economic data and its impact on the real estate market on both a local and national level. Matthew has over 30 years of professional experience both in the U.S. and U.K.
In addition to his day-to-day responsibilities, Matthew sits on the Washington State Governors Council of Economic Advisors; chairs the Board of Trustees at the Washington Center for Real Estate Research at the University of Washington; and is an Advisory Board Member at the Runstad Center for Real Estate Studies at the University of Washington where he also lectures in real estate economics.
Are you clamoring for extra rooms or a more functional floorplan in your house? Maybe it’s time to make a move. If you’ll be able to work remotely for the long-term or your overall needs have simply changed, it’s a great time to sell your house and move up. Why? With mortgage rates in their favor and higher-priced home sales powering more moves across the country, sellers in today’s market are finding the space they need (and have always dreamed of) by purchasing a home in the upper end of the housing market.
With so few homes available for sale and high demand from today’s homebuyers, sellers are profiting in major ways this season. Bidding wars are gaining traction, driving up the sale price of more and more homes throughout the country. This means sellers are able to leverage extra cash from higher-priced sales while also taking advantage of today’s low mortgage rates when they purchase their next home. It’s the perfect scenario to move up into a true dream home. According to the April Luxury Market Report from the Institute for Luxury Home Marketing:
“The Institute’s recent analysis of sales in 2020 for homes over 5,000 square feet support the continuing preference for larger homes. The analysis determined that there was a 17% increase in the number of 5,000+ sq ft homes sold when compared to the number of sales in 2019.
Luxury home prices continue to see record highs in the majority of affluent ex-urban communities, as the influence of being able to work from home is still driving buyers away from living in high density areas. Low interest rates also remain in play, allowing buyers to realize the affordability of owning a larger property, which further reinforces this trend.”
Lawrence Yun, Chief Economist for the National Association of Realtors (NAR), also explains:
“The market is hot pretty much everywhere and across all price points . . . The only area where there is sufficient inventory is in $1 million-plus homes . . . .”
While this price range certainly doesn’t fit every budget, if it’s in your reach this summer, you may want to make your move sooner rather than later. Today, more homes are available in this segment of the market, but as the report mentions, more buyers are investing here too, so competition may heat up sooner rather than later.
Bottom Line
If you’re planning to sell your current home to move into a larger one, let’s connect today. We’ll discuss your current situation and the opportunities in our local market.
Today, Americans are moving for a variety of different reasons. The current health crisis has truly re-shaped our lifestyles and our needs. Spending extra time where we currently live is enabling many families to re-evaluate what homeownership means and what they find most important in a home.
According to Zillow:
“In 2020, homes went from the place people returned to after work, school, hitting the gym or vacationing, to the place where families do all of the above. For those who now spend the majority of their hours at home, there’s a growing wish list of what they’d change about their homes, if possible.”
With a new perspective on homeownership, here are some of the top reasons people are reconsidering where they live and making moves this year.
1. Working from Home
Remote work is becoming the new norm in 2020, and it’s continuing on longer than most initially expected. Many in the workforce today are discovering they don’t need to live close to the office anymore, and they can get more for their money if they move a little further outside the city limits. Lawrence Yun, Chief Economist for the National Association of Realtors (NAR) notes:
“With the sizable shift in remote work, current homeowners are looking for larger homes and this will lead to a secondary level of demand even into 2021.”
If you’ve tried to convert your guest room or your dining room into a home office with minimal success, it may be time to find a larger home. The reality is, your current house may not be optimally designed for this kind of space, making remote work and continued productivity very challenging.
2. Virtual Schooling
With school about to restart this fall, many districts are beginning the new academic year online. Education Week is tracking the reopening plans of schools across the country, and as of August 21, 21 of the 25 largest school districts are choosing remote learning as their back-to-school instructional model, affecting over 4.5 million students.
With a need for a dedicated learning space, it may be time to find a larger home to provide your children with the same kind of quiet room to focus on their schoolwork, just like you likely need for your office work.
3. A Home Gym
Staying healthy and active is a top priority for many Americans. With various levels of concern around the safety of returning to health clubs across the country, dreams of space for a home gym are growing stronger. The Home Builders Association of Greater New Orleans explains:
“For many in quarantine, a significant decrease in activity is more than a vanity issue – it’s a mental health issue.”
Having room to maintain a healthy lifestyle at home – mentally and physically – may prompt you to consider a new place to live that includes space for at-home workouts.
4. Outdoor Space
Especially for those living in an apartment or a small townhouse, this is a new priority for many as well. Zillow also notes the benefits of being able to use yard space throughout the year:
“People want more space in their next home, and one way to get it is by turning part of the backyard into a functional room, ‘an outdoor space for play as well as entertaining or cooking.’”
You may, however, not have the extra square footage today to have these designated areas – indoor or out.
Moving May Be Your Best Option
If you’re clamoring for extra space to accommodate your family’s changing needs, making a move may be your best bet, especially while you can take advantage of today’s low mortgage rates. Low rates are making homes more affordable than they have been in years. According to Black Knight:
“Buying power for those shopping for a home is up 10% year over year, with home buyers able to afford nearly $32,000 more home than they could have 1 year ago while keeping their monthly payment the same.”
It’s a great time to get more home for your money, just when you need the extra space.
Bottom Line
People are moving for a variety of different reasons today, and many families’ needs have changed throughout the year. If you’ve been trying to decide if now is the time to buy a new home, let’s connect to discuss your needs.
Windermere is focused on keeping our clients and our community safe and connected. We’re all in this together. Since the early days of COVID-19, our philosophy has been “Go slow and do no harm.” While real estate has been deemed an “essential” business, we have adopted guidelines that prioritize everyone’s safety and wellness.
Like everything else in our world, real estate is not business as usual. While market statistics certainly aren’t our focus at this time, we’ve opted to include our usual monthly report for those who may be interested. A few key points:
- The monthly statistics are based on closed sales. Since closing generally takes 30 days, the statistics for March are mostly reflective of contracts signed in February, a time period largely untouched by COVID-19. The market is different today.
- We expect that inventory and sales will decline in April and May as a result of the governor’s Stay Home order.
- Despite the effects of COVID-19, the market in March was hot through mid-month. It remains to be seen if that indicates the strong market will return once the Stay Home order is lifted, or if economic changes will soften demand.
Every Monday Windermere Chief Economist Matthew Gardner provides an update regarding the impact of COVID-19 on the US economy and housing market. You can get Matthew’s latest update here.
Stay healthy and be safe. We’ll get through this together.
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This post originally appeared on GetTheWReport.com
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