As a courthouse buyer, my job focused on first deed-of-trust defaults. Although some investors obtain 30-60-90 day 'late lists', I rely almost exclusively on public record filings. Over the past many years, since the Great Recession, the overall national and Wake County NC default rate has declined considerably. Quite a few 'experts' (mostly press but here in BP Nation too) thought the pandemic induced moratorium would create a backlog of defaults, and that once lifted, the wave of foreclosures would hit and result in a crippling blow to the real estate market (Google search.) I put in my thoughts in this topic: Is a big wave of foreclosures on the way?

Putting the two pieces above together, the following graph shows daily defaults since 1/1/2020 to today, 2/10/2023. Without annotating the graph, most investors would probably not be able to identify where the foreclosure moratorium began and ended.

A by-product of the pandemic, though, is what I call panic buying. It seemed like everyone was jumping on the real estate bandwagon. What I wanted to find out is 'how many, relatively, of these buyers screwed up?' When I saw screwed-up, I mean landed in default. On a macro level, I looked at the loan origination date (by year) relative to the default filing. I took 'snapshots' over different time frames to see if any patterns emerged. The first graph below shows a 'normal', or maybe 'expected, default profile would look like. The graph shows, for defaults occurring in the first six weeks of 2015, the year of loan origination for each loan that was in default. For this timeframe, over 30 loans out of the 194 loan sample were originated in 2008. This comes as no surprise to anyone in the real estate business.

I then looked at 2020 through the end of 2022. The two graphs below show defaults in the second half of 2021 and the first half of 2022. In this timeframe, the loans originated in 2021 led all other years by a wide margin. Imagine that. Eight people took out loans in the first half of 2022 and were already in default in the first half of 2022.

The mortgage rates in 2021 were some of the lowest in history, starting the year at 2.65% and never going over 3.18%. The area also had accelerating house price appreciation. Why would new loans be a problem?

One (scary) conclusion could be that these new real estate owners decided they made a mistake and walked away, something we haven't seen since the aftermath of the Great Recession. Back then, the term used to represent this phenomenon was 'strategic default.' I call this scary because, even though the pandemic didn't lead to mass defaults, now in 2023 we have some converging negative fundamentals. Home prices are stagnant at best, with high interest rates, lower home affordability, and high builder inventory. If people would walk away in 2021Q4 and 2022Q1, what happens when prices drop further? The iBuyers like Opendoor are gone from the local market and can't absorb unwanted property. As I pointed out in my post in My thoughts on the latest episode of On the Market locally there are roughly 7,100 parcels owned by builders, which seems like a lot considering that in all of 2022, there were 20,608 home sales in Wake County (reference link in other post). When I posted there three days ago there were 5,362 houses, townhomes, mobile homes, and condos on the market. Of those, 3,280 were identified as new construction. In that other topic, I posted about Lennar cutting prices. Builder saw record margins over the past two+ years. If (when) builder's margins return to pre-pandemic levels, home prices could realistically fall by double digit percentages. Comparable existing housing prices would be negatively impacted.

The strategic defaults of 2021Q4 and 2022Q1 could be a glimpse of what to expect in the near future if (or as) conditions in the local market deteriorate.

Raleigh, North Carolina

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