Foreclosures In America

[Mathios Yonan]

Hi, whoever might see this. I'm a freshman in college and starting off as a realtor (so any money I could possibly get helps). Foreclosure.com does an annual scholarship giveaway based on the topics they want to be answered in their prompt. I hope you guys can possibly contribute to this essay. Below are the questions they wanted answered and any information provided is greatly appreciated. Thanks :)

Prompt:

2023 essay topic:

The real estate market slowdown and its effect on foreclosures in 2023

There is much speculation on how the current foreclosure market will evolve due to a variety of factors such as:

• Rising inflation costs.
• Rising mortgage rates and higher monthly mortgage payments.
• The expiration of COVID-related forbearance and mortgage protection programs.
• Discuss how these factors will change the foreclosure market in the coming year.

[Ricardo R.]

@Mathios Yonan okay Mat, I'll assist you in compiling a different point of view into your already formulated and ongoing research: 

Rising inflation costs: 

This is usually a good thing in regards to real estate and those that ALREADY own real estate because they, will likely see an increase in their property value and in turn their net worth. However, rising inflation usually contributes to higher interest rates so, those which are looking to purchase homes, or refinance homes or already own a home but which is financed via a variable interest rate loan product, will feel the affects in a NEGATIVE way, since they will start to feel 'priced out' of the market. 

Rising mortgage rates and higher monthly mortgage payments:

Again, this won't affect those in a free and clear home or those which own a home in a fixed interest rate loan product as much, in this sense real estate is usually considered a hedge against inflation BUT those in variable interest loan products and those new buyers seeking to purchase  or refinance an existing home will feel the effect. Keep in mind that increased inflation is in simple terms just a devaluation of money meaning it takes more dollars to buy the same item. This logic applies to mortgage products too, as in the costs it takes for a lender to maintain them. So since the cost to maintain such products by the lender now requires more dollars, those costs are carried forward to the consumer in the form of higher interest rates for the same loan products. 

This of course increases mortgage payments and decreases consumer buying power - For example: A $340K home in a 30 yr. 4.5% interest loan will have a payment of $1,723 HOWEVER the exact same home at 7.953% interest will have a payment of $2,484 -- THAT'S A DIFFERENCE OF $9,132/yr. FOR THE SAME HOME!!! Not even counting for all other inflation related costs that come with owning a home i.e. maintenance, utilities, etc. -- Now considering that the AVERAGE salary across the US is @ $59,500/yr. --- that difference equates to an increased 15% cost for the same home - that is just the difference in increase... haven't even talked about the total cost. I guess you can also see it as a decrease of 15% in purchasing power. Now a new purchaser seeking to buy a home will have the option to 1) not buy or  2) buy a less expensive property, so as to decrease their monthly mortgage obligation BUT someone which is in a variable interest loan product i.e. HELOC's, Commercial Mortgages, ARM's etc. WILL HAVE LIMITED OPTIONS and they will see an increased required monthly payment.

The expiration of COVID-related forbearance...

Decreased protections from these programs will only add to the impact that the latter example from above will experience and they will have even fewer options to avoid foreclosure. 

Discuss how these factors will change the foreclosure market...

Hard to tell as there are MANY other factors that affect the real estate market HOWEVER, you may see increased foreclosures but as long a real estate demand remains high then the logical remedy for someone experiencing increased payment requirements is to sell. The opposite however could also occur if demand for real estate declines, this could also lead to lower inflation, which would in turn eventually lead to lower interest rates and thus relieve the burden on those who previously experienced it... it's just a question of how long that process takes which will likely dictate how many foreclosures there are... interest rates tend to lag behind inflation weather up or down. So, because Sellers have the option to sell now during a strong real estate market and because if there is a decline in the market, it will likely lead to decreased inflation and decreased rates and thus in-turn 'rescuing' HELOC's and ARM's and Commercial loan products - I wouldn't expect there to be a larger than normal foreclosure rate BUT this will be dictated by the length of the process and by the length of the 'lag' between inflation and rates.

This was fun. I hope this helps.