No, the market is not going to go bust
As we move into 2023, the end of the foreclosure moratoriums, coupled with the expiration of a large number of forbearance plans, will likely lead to an increase in Real Estate Owned (REO) properties. However, unlike the housing bubble, this increase in REOs will not result in a surge of foreclosures and significant impact on house prices, as most homeowners have substantial equity in their homes and lending standards have remained solid.
According to a recent report by CoreLogic, U.S. homeowners with mortgages have seen a 7.3% year-over-year increase in equity, representing a collective gain of $1 trillion, or an average of $14,300 per borrower, since Q4 2021. Additionally, with low mortgage rates, most homeowners are not expected to face financial difficulties.
While the number of REOs is increasing, it remains relatively low, with Fannie Mae reporting 8,779 REOs at the end of Q4 2022, up 23% from the previous year but still below pre-pandemic levels. Delinquencies have also increased, but this is largely due to loans in forbearance, which are counted as delinquent in surveys but not reported to credit agencies.
The increase in foreclosures is expected to be modest, with Black Knight reporting 32,500 foreclosure starts in January 2023, up from 28,200 in December 2022 but still 37% below pre-pandemic levels. The distressed sales during the housing bust led to cascading price declines, but this is not expected to happen this time due to solid lending standards and substantial homeowner equity.
In summary, while there will be an increase in REOs and foreclosures in 2023, it is not expected to have a significant impact on house prices, and the real estate market is expected to remain relatively stable due to the solid lending standards and substantial homeowner equity.