California Foreclosures Are Coming?

by | Mar 31, 2023 | Market Update, The Market Brew

Is there a looming threat of California foreclosures on the horizon? Will the Spring Market be a bust as prices cool for the 7th straight month? What factors do you really need to consider if you were thinking about buying this year? This is the market brew.

Foreclosures Have Doubled Since 2021

You may have noticed some headlines lately about the looming threat of foreclosures, and how that will have a major impact on the Real Estate marketplace. Yes, it’s true that foreclosures in 2022 more than doubled from 2021. On the surface this statistic sounds horrifying, but statistics are a funny thing.

Here is a graph showing foreclosure filings between 2017 and 2022. As you can see, foreclosure filings did indeed more than double in the last year. But, when displayed like this, you can probably see why it’s not as scary as it sounds. 2017 to 2019 were the last three years prior to the COVID-19 outbreak. The average number of foreclosure filings during those three “normal” years was just shy of 600,000 filings per year. We were just a bit over half that in 2022.

What about all the doomsayers saying that this will be a repeat of the 2007 crash? Well, what do you think? At the peak of the market crash, there were 2.9 million foreclosure filings within the US. We are currently sitting at about 11% of that number.

So, what should we expect with foreclosure filings moving forward? There may be a temporary increase over that average 600,000 number in the immediate future. Look at the years 2020 through 2022. There are about 1.1 million homes during that time that would have been foreclosed on, that were not due to the foreclosure moratorium. Many of these homes are still under water and will likely face foreclosure in the future. So if you take all these back dated foreclosures along with the estimated 600,000 per year average, the number of foreclosures may shoot up over a million. But this will only be temporary.

Spring Buying Will Be Slow

The spring buying season is just around the corner, but will things pick up this year? Unfortunately, things aren’t off to a good start, and there are three reasons for that.

  1. Inventory
  2. Inventory!

Nobody wants to sell their house this year, and I can’t really blame them. The last couple of years, interest rates were at historic lows, and many homeowners chose to refinance their homes. I’m also a Certified Residential Appraiser, and when I say there were a lot of refinances over the past couple of years, believe me. There were so, so many. In 20 years, I have never been so busy in my life.

With that said, a lot of homeowners are sitting on a pretty sweet interest rate right now. We’re talking in the 2% to low 3% range. It’s very unappealing to say the least, to lose that rate and take on a rate in the high 6% to 7% range in a new home.  So, I understand why inventory is as low as it is.

It’s not all doom and gloom for buyers. Because inventory is slowly coming back, and despite what the misleading Y-axis shows on this graph, inventory is only down 15.9% from last year. But, keep in mind that last year also had really low inventory, as did 2021. But, there are less buyers in the marketplace, so if you can qualify for a loan this year, you will have a much easier time purchasing than you had over the prior couple of years.

All You Need to Think About

Everything going on in the market is just noise. Nobody can predict the future with any level of certainty, so why even try. If the most pressing question you have right now is: “Is now a good time to buy, or should I wait?” You need to ask yourself these two questions.

1) Is my household currently in a stable financial position? This includes having a down payment available as well as sufficient savings should some unforeseen personal situations occur.

2) Do I plan on living in this area or neighborhood for at least the next 3 – 5 years?

If your answer to both of these questions is a yes, then it may make sense for you to buy a home right now. If you are uncertain about either of these questions, or you answered no to at least one, then it may be prudent to wait.

Outside of some major external factor, the time to purchase a home is when your life events merit purchasing. Home prices will fluctuate both up and down, but over the long term, homes typically do appreciate in value. Keep in mind that past performance is no indication of future success, but, if you are looking at the difference between renting and buying, owning a home over the long term will always win out, as your monthly payments are being used towards building personal equity, and not enriching your landlord.

Look at how the housing market has performed historically. Over the prior 30 years, the average home price within the United States increased approximately 289.1%. Here in California, we are doing a little better with an average increase of 300% over the prior 30 years.

Will home prices ultimately keep increasing over time? Nobody can say with absolute certainty. However, to the long-term homeowner, this is an opportunistic market. Many times, we get caught trying to time the market. In reality, time in the market is more important than timing the market.