Is a Wave of Foreclosures Coming? The Reality of Today’s Foreclosure Market

Every few months, another alarming headline seems to appear:

Foreclosures are rising.”

A foreclosure wave is coming.”

The housing market is about to crash.”

We've been hearing versions of these predictions for years.

In fact, back in February 2021, we wrote an article asking essentially the same question:

Is a Wave of Foreclosures Coming?”

So rather than react to another scary headline, let's look at what actually creates a foreclosure crisis—and why seeing foreclosure activity increase doesn't automatically mean we're headed back to 2008.

Foreclosures and a Foreclosure Crisis Are Not the Same Thing

This is the first distinction buyers, sellers, and investors need to understand.

There will always be some foreclosures.

People lose jobs.

Businesses fail.

Families experience financial hardship.

Borrowers fall behind on mortgage payments.

Those individual situations are real and serious.

But the existence of foreclosures doesn't mean the entire housing market is experiencing a foreclosure crisis.

For that to happen, we would need enough distressed properties entering the market to significantly disrupt the balance between housing supply and buyer demand.

That's a much higher bar.

Why Everyone Still Thinks About 2008

When people hear the word foreclosure,” many immediately think about the Great Recession.

That's understandable.

The previous housing crash left a lasting impression, especially here in the High Desert.

But the conditions surrounding that housing crisis were very different from a normal housing slowdown.

During that period, the market had a dangerous combination of problems:

• Too much housing inventory
• Weak buyer demand
• Risky lending
• Subprime mortgages
• Low- and no-down-payment loans
• Cash-out refinances
• Homeowners with little or no equity
• Large numbers of distressed and forced sellers

When those conditions collided, foreclosures added even more properties to an already oversupplied market.

That's when things became ugly.

Today’s Homeowners Are in a Different Position

One of the biggest differences in the market we've been analyzing is homeowner equity.

Many homeowners today have substantial equity in their properties.

That matters.

Imagine a homeowner runs into financial trouble but owes $300,000 on a house worth $500,000.

That homeowner potentially has options.

Depending on the circumstances, selling the property may allow the mortgage and other obligations to be paid while preserving some of the owner's equity.

Now compare that with a homeowner who owes $500,000 on a house that's only worth $400,000.

That's a very different problem.

When large numbers of homeowners are underwater at the same time, the potential for distress becomes much greater.

Equity can act as a cushion.

Mortgage Payments Matter Too

Another important difference involves the mortgages homeowners already have.

Many homeowners obtained their loans during periods when mortgage rates were considerably lower.

That creates what people sometimes call the mortgage-rate lock-in effect.

A homeowner with an affordable existing mortgage may be reluctant to sell the house and replace that loan with a substantially higher monthly payment on another property.

That has an interesting effect on the housing market:

It can reduce the number of homes coming up for sale.

And limited inventory can help support home prices even when buyer demand has weakened.

Supply and Demand Still Run the Housing Market

At the end of the day, housing comes back to supply and demand.

The previous foreclosure crisis didn't occur merely because foreclosures existed.

It occurred in an environment where the market already had too much supply relative to demand.

Then distressed properties added even more inventory.

Think about what happens when thousands of homeowners must sell.

Those sellers don't necessarily have the luxury of waiting six months for the perfect offer.

They may have to reduce the price.

Then another seller reduces.

Then another.

Eventually, sellers begin competing aggressively for a limited number of buyers.

That's how downward pressure can accelerate.

Forced Sellers Are the Number to Watch

This is one of the most important concepts when trying to understand whether a housing downturn could become something more serious.

Ask:

Where are the forced sellers?

A homeowner who wants to sell and a homeowner who has to sell behave very differently.

If someone doesn't like the offers they're receiving but can comfortably afford the mortgage, they can say:

Forget it. I'll stay.”

A distressed homeowner may not have that option.

So when evaluating predictions of a foreclosure crisis, don't just count foreclosure headlines.

Look for evidence that financial distress is creating a large and sustained increase in forced selling.

That's the bigger warning sign.

What Would Cause Foreclosures to Rise Significantly?

One factor we'd watch closely is employment.

Mortgage payments require income.

If significant job losses occur, some households will inevitably have difficulty making their payments.

But even then, the effect on foreclosure activity isn't necessarily immediate.

Financial distress has to develop.

Payments are missed.

The loan becomes delinquent.

The foreclosure process takes time.

And homeowners with substantial equity may still have alternatives to losing the property through foreclosure.

That's why a prediction that the economy might weaken isn't the same thing as proving that a massive foreclosure wave is imminent.

Why Housing Inventory Matters So Much

Suppose foreclosure activity rises somewhat.

What happens next depends partly on the rest of the housing market.

If buyer demand is healthy enough to absorb those properties, the impact may be relatively limited.

But if foreclosure inventory surges at the same time ordinary sellers are flooding the market and buyer demand collapses?

Now you have a much bigger problem.

This is why we keep coming back to inventory.

Housing prices aren't determined by one statistic.

They're the result of multiple forces interacting at the same time.

Are Rising Foreclosures Automatically Bad for Home Prices?

No.

This is where percentages can be misleading.

Imagine foreclosure activity falls to an unusually low level and then increases.

A headline can accurately say:

Foreclosures jumped 30%.”

That sounds dramatic.

But 30% above an extremely low number can still be a relatively low number.

The starting point matters.

That's why percentages without context can create unnecessary fear.

When somebody tells you foreclosures are surging,” ask:

Compared with what?

Compared with last month?

Last year?

Pre-pandemic levels?

Or the foreclosure-crisis years?

Those comparisons can tell very different stories.

Could Another Foreclosure Crisis Happen?

Of course.

Real estate markets aren't immune from economic problems.

If we experienced significant job losses, deteriorating homeowner finances, falling equity, rapidly increasing delinquencies, a flood of distressed properties, and weakening buyer demand at the same time, the picture could change.

That's why we watch the data.

But there's an important difference between saying:

A foreclosure crisis is possible.”

and saying:

A foreclosure crisis is happening.”

Predictions should follow the evidence—not the other way around.

Buyers Waiting for Foreclosures Should Understand the Trade-Off

We often hear from buyers and investors who are sitting on the sidelines because they're waiting for foreclosure bargains.

Maybe that opportunity eventually develops.

But waiting is still a market decision.

While you're waiting, several things can change.

Home prices can move.

Mortgage rates can move.

Inventory can change.

Your own financial situation can change.

And the distressed inventory you're expecting may never materialize at the scale you anticipated.

That's why buying a home shouldn't be based solely on predicting the next crash.

The High Desert Needs to Be Viewed Locally

National foreclosure statistics are useful, but we're also interested in what those numbers mean here in the High Desert.

Real estate conditions can vary significantly between:

• Apple Valley
• Victorville
• Hesperia
• Adelanto
• Oak Hills
• Spring Valley Lake
• Phelan
• Pinon Hills
• Barstow
• Surrounding High Desert communities

Price range matters too.

A change in foreclosure activity doesn't necessarily affect every neighborhood or every price range equally.

That's why national headlines should be a starting point for research—not the final word on your local market.

What Are the Warning Signs We Would Watch?

If we're trying to determine whether foreclosure activity is becoming a genuine threat to the housing market, we'd pay particular attention to a combination of indicators:

Rising unemployment.

Increasing mortgage delinquencies.

Rapid growth in foreclosure starts.

More distressed properties reaching the market.

Falling homeowner equity.

A significant increase in housing inventory.

Weakening buyer demand.

Large numbers of homeowners being forced to sell.

One of those numbers moving by itself doesn't necessarily create a housing crisis.

A dangerous combination of them would deserve much more attention.

Don’t Let Social Media Make Your Real Estate Decisions

There's never a shortage of housing-market predictions.

Your coworker has one.

Your neighbor has one.

YouTube has about 40 million of them.

And somebody somewhere is always absolutely certain that the housing market is about to either collapse or explode.

The problem is that certainty gets clicks.

Context makes better decisions.

Before deciding to buy, sell, or sit on the sidelines because of a foreclosure headline, look at current information and talk with professionals who understand what's actually happening in your local market.

The Bottom Line

Foreclosures are part of a normal housing market.

A foreclosure crisis is something very different.

The Great Recession involved a combination of excessive housing supply, distressed homeowners, risky lending, weak equity, forced selling, and insufficient buyer demand.

That's the comparison that matters.

If foreclosure activity begins rising, we should pay attention.

But we should also ask:

How much is it rising?

From what level?

Are homeowners actually being forced to sell?

How much equity do they have?

What's happening with employment?

What's happening with housing inventory?

And are buyers still absorbing the homes coming onto the market?

Watch the data, not the drama.

Because an increase in foreclosures doesn't automatically mean another 2008 is around the corner.

Have a Title or Escrow Question?

We're Bobby Tarango and Mike Arias, sales representatives with Chicago Title, and we work with real estate professionals throughout the High Desert to support their title and escrow needs.

Through ChicagoTitlePro.com and TitlesEverything.com, we share real estate information and resources designed to help real estate professionals, buyers, sellers, and property owners better understand the housing market, title, escrow, and the many moving parts of a real estate transaction.

If you're working on a transaction or have a question about title or escrow, reach out to Bobby or Mike.

Bobby Tarango & Mike Arias
Chicago Title
Title & Escrow Sales

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