I was afraid that this might happen.
When RealtyTrac reported that October foreclosure activity was up 15% compared to September, I braced myself, waiting for the inevitable Chicken Little headlines predicting a new foreclosure tsunami, a massive housing market meltdown and quite probably the end of civilization as we know it.
Sadly, I wasn’t disappointed.
So, are we about to see housing Armageddon? Do these ominous increases in foreclosure activity mean that the market is about to implode?
No. Not even close. Allow me to explain.
It’s true that RealtyTrac reported an increase in overall foreclosure activity in October (a month, it should be pointed out, when foreclosure activity goes up almost every year). But despite some industry analysts pointing to these numbers as “proof” of a surge in foreclosures or of weakness in the housing market, it’s important to keep the numbers in their proper context.
First of all, the most important metric in the RealtyTrac report is that foreclosure activity was actually down 8% on a year-over-year basis, the continuation of a downward trend that started in late 2010, and hasn’t stopped since.
Second, it’s very important to parse the RealtyTrac numbers to see what actually caused the month over month spike. The increase was entirely comprised of properties entering the final stages of foreclosure – those scheduled for auctions, and those repossessed by the lenders. Repossessions were up 22% compared to the prior month, but down 26% from October of 2013. Properties scheduled for foreclosure auctions were up 24% from the prior month and up 7% from 2013. Foreclosure starts – which actually would be indicative of a new wave of activity – were down.
So what to make of these numbers? Do they really indicate a real increase in foreclosure activity? Again, no they don’t, if you understand what the numbers represent.
Neither of the two areas of foreclosure activity that spiked in October represents “new” or “rising” foreclosures. In fact, virtually all of the loans in these later stages of the foreclosure process have been in the system for quite some time. According to RealtyTrac, over 78% of all loans in foreclosure were originated in 2008 or earlier. All we’re seeing happen now is that extraordinarily delinquent loans that should have been foreclosed on years ago are finally working their way through the system. In most cases, these are loans on which the borrowers haven’t made a single payment in two or three (or more) years. These are not “new” foreclosures by any definition: it’s taken 1,000 days to move one of these properties through the foreclosure process in New York and New Jersey; 900 days in Illinois and Florida. These foreclosures are more like an echo of the market downturn we had from 2008 to 2011 than they are a clarion call of a new problem.
But aren’t all these loans going to auction or being repossessed an indication of a weak housing market? Ironically, just the opposite. Home price appreciation over the past few years has reduced the losses that lenders might incur by selling properties at a foreclosure auction, so we’re seeing more auctions (and fewer short sales). And inventory insufficient to meet demand at the low end of the market makes it possible to sell REO homes almost as soon as they’re made available, so we’re seeing more repossessions and very active marketing of these properties in short order.
There’s simply no objective, rational way to support the notion that we’re experiencing – or should expect – another wave of foreclosure activity. RealtyTrac data have shown year over year declines in foreclosure activity for several years running. TransUnion reported that mortgage delinquencies have dropped by 17% over the past year. The Mortgage Bankers Association, in its recent third quarter National Delinquency Survey, noted that delinquency rates are at their lowest level since the fourth quarter of 2007, and foreclosure starts at their lowest level in eight years.
And there’s simply no way at all to tie this foreclosure activity to any real – or imagined – weakness in the housing market. There are no conditions in the market that are causing these foreclosure actions, and the actions themselves are having virtually no effect whatsoever on the market itself.
We’re not completely out of the woods yet. Foreclosure rates, while about half what they were at the peak of the crisis, are still roughly twice what they would be in a normal market. But once the backlog of seriously delinquent – and seriously aged – loans finally works its way through the system, it’s likely that we’ll settle in at foreclosure rates even lower than what they’d normally be (thanks in no small part to the incredibly tight credit conditions we’ve seen over the past few years).
The crisis has passed. The patient is well on the way to a full recovery. Patience, not panic, is the order of the day.