2023 Foreclosure Forecast: A False Flag with Inflated Numbers?

2023 Foreclosure Forecast: A False Flag with Inflated Numbers?

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Foreclosures, mortgage rates, housing prices; if there’s one person to ask about any of it, it’s Rick Sharga, Executive Vice President at ATTOM, who handles housing market data and forecasting all day, every day. Rick is often seen as a housing fact crusader, taking down the clickbait hype that many mainstream articles love to post. While other media channels push fear, Rick focuses on facts, showing what’s happening in the housing market, whether it’s good or bad news.

Rick knows much more about home foreclosure numbers than most, so we took time today to ask him exactly how rising interest rates, crushing unaffordability, and shrinking home prices affect today’s homeowners. Could there be a foreclosure crisis on the horizon? Or, are homeowners in such a solid position that the chance of getting foreclosed on is slim to none? And if you’re looking to make some money during this declining market, which strategy would work best as buyers and sellers get desperate?

We also take a chance to get Rick’s opinion on where interest and mortgage rates could be heading over the next year. Rick lays out the exact scenarios that could cause rates to plummet or rise multiple percentages and how homebuyers may go through a rate “reprogramming” to get hungry for houses once again. If you’re holding, buying, selling, or renting in 2023, this is the data you need to know!

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Read the Transcript Here

Dave:
Hey everyone, welcome to On the Market. I’m your host, Dave Meyer. Joined today by the birthday boy, Jamil Damji. Happy birthday man.

Jamil:
Thank you man. It was 44.

Dave:
Wow.

Jamil:
I know. Where is the time going?

Dave:
How do you feel?

Jamil:
44.

Dave:
Does that feel old? Young?

Jamil:
It feels good, honestly. It’s been a crazy year. Lots has happened with the real estate market and just life in general, but I’m grateful for all of it and super excited about this conversation with Rick.

Dave:
Yeah, absolutely. Well, you have the energy of a person half your age, so I think you’re doing pretty good.

Jamil:
Thank you.

Dave:
Yeah, absolutely. And this conversation is great. Jamil, we interviewed him June or July probably?

Jamil:
Yeah, right before the other shoe dropped in the real estate market. And it was an interesting conversation and I’ve got to say that probably my favorite episode of the entire year talking to Rick, because you get a real insight into what’s happening based on the numbers, not based on emotion, not based on jargon or sensationalism, just data. And it’s always important to pay attention to what the numbers are saying versus what the people who are trying to sell stories are saying.

Dave:
Absolutely. Yeah, I think he’s not dry at all. He’s very entertaining, he’s fun to talk to, but he’s just not emotional about it, which I think is really important and nice that he just provides this sort of unbiased objective analysis of what’s going on in the market. And we cover everything in this interview. We’re talking about foreclosures, mortgage rates, the US economy, everything you can imagine.
So, this show is our first show of the year, so if you want to get a head start on what’s going to happen in 2023 and what to be looking for over the course of this year, you’re going to really enjoy this episode, because Rick provides some really accurate and objective information that’s going to be really actionable for you.

Jamil:
Agreed. Take notes guys.

Dave:
All right, well, with that we’re going to take a quick break and then welcome on Rick Sharga, the Executive Vice President of Market Intelligence for ATTOM Data. Rick Sharga, welcome back to On the Market. Thanks for joining us again.

Rick:
Thanks for having me back. I guess the first time wasn’t all that bad.

Dave:
Oh, come on, you were very insightful. It’s actually one of our most popular shows ever. You did an excellent job and we are excited to have you back again.

Rick:
Appreciate that.

Jamil:
I feel like after talking to Rick for any amount of time, you actually leave that conversation substantially smarter. So, thank you for helping all of us raise our IQs today.

Rick:
I was really pleased that Adam gave me the title of EVP of Market Intelligence, because it’s the first time in my career anybody has used intelligence in the same sentence with my name, so it’s always a pleasure.

Dave:
That was very clever of you to orchestrate that. Well, Rick, the last time we had you on was over the summer and we were sort of reaching the peak of the housing market frenzy, at least in terms of sales price. Things have changed a lot over the last couple months and we would love to just start with your summary or thoughts about what’s happened over the second half of 2022 in the national housing market.

Rick:
Well, last time we talked, you probably remember we were discussing the fact that we’d started to see a little bit of evidence of demand weakening. That actually started back at the beginning of the year, and it was really related to affordability because home prices were still going up 15%, 20% on a year-over-year basis. When the Federal Reserve decided to roll up its sleeves and actually address inflation by putting together a series of unprecedented hikes in the Fed funds rate, that really roiled the mortgage markets and we saw mortgage rates double.
According to Freddie Mac, it’s the first time that’s ever happened in a calendar year. We’ve never seen mortgage rates actually double in a calendar year before and that’s just cratered affordability. So, we’ve seen month over month home sales go down in both new homes and existing homes. We’re probably going to end this year, even though we had a pretty good start, and we’re going to probably end this year with 15% to 20% fewer home sales than we had a year ago.
We’ve seen home price appreciation flatline basically. We’re looking at markets like California where the year-over-year increase in prices is now down in the 2% to 3% range where it had been in double digits earlier in the year. And there are parts of the country where we’re actually seeing prices decline. We’ve seen the last four months in a row where home prices have dropped month-over-month. That’s not necessarily unusual this time of the year, but the degree of the drop has been stronger than usual. But when you think about it, the average monthly mortgage payment on a house you would’ve bought a year ago has gone up, depending on where you are in the country, from 45% to 60%. And I don’t know about you guys, but when I talked to my boss about a 45% to 60% raise, he kind of chuckled politely and told me to go back outside and play.
So, it’s really knocked a lot of prospective home buyers out of the market. We’ve seen research that indicates that anywhere from 10% to 20% of people who we’re looking to buy have opted to rent for a while instead. For your audience, that does suggest there might be some opportunities for rental properties, for single family rental units, because if people were looking to buy a house, it stands to reason they might be interested in renting one instead of an apartment. But we’re going to end the year pretty much on a downward trend. That will probably move into next year as well.
Although I don’t think the decline in home sales will be nearly as significant next year as it was this year. Keep in mind one other… And then I’ll stop talking for a while. One other thing to keep in mind contextually is that we’re coming off home sales in 2021 that were unusually strong. 2021 was not an average year for home sales. It was a way above average year for home sales. So, it wouldn’t have been a surprise to see the numbers come back a little bit. But the 15% to 20% drop is strictly and solely because of actions the Fed has taken and the impact they’ve had on mortgage rates.

Jamil:
Rick, the last time we spoke, the market was in a completely different spot, and I’m always trying to get an understanding of what may be coming around the corner. And I’m in the fix and flip business. I had to write a couple of checks. I’m in Phoenix, Arizona, and so one of the markets that you’re talking about that’s going to experience a massive kick in the teeth, I got implants in the front here from the kick I got.

Rick:
They look beautiful by the way. Nobody would ever know.

Jamil:
Thank you. Thank you. Thank you. The facts are for us as rehabbers, things are not looking really strong right now. On the other side of that, I’m looking for opportunities because every time something like this happens, there’s opportunities under the surface. And I’m almost wondering if what we’re seeing right now is, and I’m coining it, the great reprogramming, and this is why. We’ve all been so spoiled with these 2% and 3% mortgages that were in the market for so long that had a lot of people entering the space and trying to enter the housing market. A lot of those purchasers, a lot of those people, will never let go of that debt. They’re going to hang onto that house, even if they keep it as a rental, they’re not going to reintroduce that product back into the marketplace.
We’ve had the Fed raise rates in an unprecedented manner, like you’ve described, and that has stopped a lot of activity, especially in home building. And so we’ve had builders completely turn the knob in the other direction where they’re holding back. So, we have this inventory that’s going to get yanked off because of all the cheap debt, we’ve got builders stopping or slowing down their building, we’ve seen demand really level off. And I believe because rates are so high right now, as soon as we start creeping back towards 5%, we’re pulling this elastic band where we’re all going to feel really grateful for a 5½% mortgage when it comes.
Because when it’s sitting where it is right now, as soon as we get reprogrammed into thinking 5½ or 5% is cheap, that’s when I think there’s going to be a crazy amount of buyers rushing into the marketplace. And that’s why I feel like it’s the great reprogramming. Do you see that coming in 2023 and is my viewpoint on this out to lunch?

Rick:
No, you’re not out to lunch at all. The problem I’m going to have answering your question is there’s so much to unpack there. You basically just brought up about five different themes and they’re all relevant, they’re all important to the marketplace. So, on the last question about whether your thesis is something that’s out to lunch, no, I can lay out a scenario where the market recovers pretty quickly. Now everything has to fall in place, but it could happen. So, first of all, there’s still pent up demand and it’s not the kind of goofy speculative demand we saw back in 2008.
This is demographically driven. We still have the largest cohort of young adults between the ages of 25 and 34 in the history of the country. That’s prime household formation age. A lot of them would prefer to own, they may have to rent short term while they’re figuring things out, but they’re forming households. That drives demand. The demand was slowed down significantly because all of a sudden the house you thought you were going to buy, you couldn’t afford or you can’t qualify for the loan. But let’s unpack affordability first, because that drives a lot of purchase activity.
There’s three legs of the stool when it comes to affordability. The one we’ve been focused on obsessively for the last few years is home prices. So, obviously the nominal home price, what the price is listed for is the thing that everybody focuses on and we’re at a new peak. We’re still at a new peak. That was offset by the second leg of the stool, which was mortgage rates. And historically low mortgage rates offset those rising home prices, as you mentioned, you’re down in the 2% range for mortgages. That made it possible for people to afford homes even as home prices were going up.
What also made it possible, and this is the leg people most often ignore of the stool, is that wages have been growing. So, we’ve seen unusually strong wage growth for the last couple of years since the government allowed everybody to go back to work after the pandemic started. But 5% to 6% annual increases in wages, excuse me, that wasn’t keeping up with 15% and 20% increases in home prices. But it’s actually now two to three times higher than home price appreciation. So, let’s assume that wage growth continues to be about what it is. Let’s assume that home prices have plateaued, or in some markets are actually coming down a little bit. It’s possible that because inflation appears to be heading in the right direction, the Fed can stop being so aggressive with its rate increases, which means that mortgage rates may have peaked this cycle and it will start to come down.
So, if you have mortgage rates trending down, maybe slowly, but trending down over the course of the year, wages stay strong, home prices have flatlined, somewhere in 2023 it starts to feel a lot more affordable and you have people start to come back to the market. So, I don’t think your thesis is crazy. The other thing that will change the dynamic of buyers is the market always adjusts as home prices go up or as interest rates go up. The problem we had in 2022 was that the increase in interest rates was so sudden and so severe. So, all of a sudden that million-dollar house, that $500,000 house you were looking at is out of the question and you have to reset your expectations for a $250,000 house, which you weren’t looking at and which you hadn’t even contemplated before.
So, it takes the market a while to adjust, but to your point, if interest rates trickle back down into the fives, maybe now you’re not looking at a $250,000 house, you’re looking at 375 or four and maybe you just needed a little bit more time to save for a down payment. So, it does change the buying dynamic significantly. And I do think you’re right, I think the first quarter, maybe the second quarter, the first part of the second quarter are going to continue to be a little slower than normal, even with the scenario we just outlined. But as you get later in the year, I think people will have been able to adjust and it will look a little bit more affordable and we’ll start to see buying activity come back.
So, overall I expect 2023 home sales to go down, probably not quite 10%, maybe somewhere between 5% and 10% from this year, but I expect the second half of the year to be stronger relative to the first half.

Dave:
Rick, I think that’s a great way of explaining affordability. And to me what I keep thinking is that the direction of home prices and volume are, to your point, almost entirely contingent on mortgage rates. And because of affordability, like you said, right? Right now we’re recording this mid-December. Yesterday we found out that we had a very encouraging inflation print come out and we’re seeing, I think mortgage rates today were 6.3 on average for a 30-year fix, something like that.
If we see it stay around there or lower, in my opinion, people, like Jamil said, are going to get used to it and jump back into the market because there’s demographic demand. But can you lay out a scenario where mortgage rates do go up? Because I think that is a big question for a lot of people. Is there a scenario where mortgage rates haven’t peaked and they go back up to 7% or 8%? Because when I look at experts, they seem divided. Some people say it’s going back to the five, some people say it’s going up to eight. So, can you, even if you don’t necessarily think this is going to happen, tell us what scenario would have to unfold for mortgage rates to go up beyond where they were a couple weeks ago when they were in that low sevens?

Rick:
Yeah, there are a couple scenarios. One, the Fed could decide that it needs to continue to be aggressive or at least more aggressive than what the market is expecting. And that sort of uncertainty, that sort of volatility could cause rates to go up. One of the things you have to keep in mind is that usually 30-year mortgages are based on the yields of the 10-year US Treasury, and those two rates kind of go hand in hand. And this is kind of inside baseball for probably a lot of your viewers, but bear with us. Normally there’s a spread of about 150 to 200 basis points, or in English one and a half to two points. So, if the yield on the 10-year treasury is four, a mortgage would typically be 5½ or 6%. Right now the spread has a hundred extra basis points.
So, if we were just in a normal market, mortgage rates would probably be almost a point lower than they are today. So, you’d already be in the fives. One of the reasons they’re not is because of uncertainty and volatility in the market and the belief that as interest rates come down on mortgages, you’ll see a ton of these loans that have been taken out since rates rose, start to be refinanced. Which means if you’re buying a mortgage on the secondary market, you’re not going to be able to recoup your investment. The loan is going to be gone in a year or two. So, the pricing model has the secondary market spooked. So, the Fed could continue to raise beyond what people are expecting. Right now the peak of the Fed funds rate is expected to be somewhere around 5%, 5¼%.
If they go beyond that threshold, it will clearly drive mortgage rates up. So, an inflationary surprise or fed activity is one scenario. I don’t honestly see that, but it is a scenario. The other is global volatility and we don’t talk a whole lot about this and it’s something that’s pretty much out of our control, but there’s a lot of concern about global economies tanking. When that happens, you often see a lot of foreign capital come into US treasuries, and the more foreign capital that comes into US treasuries, the lower yields get. That actually could drive mortgage rates down further. The flip side of that is if that money has to stay in the foreign economies and there’s less activity trading up the cost of the bonds, we could see yields actually increase. And if that happens, you wind up with mortgage rates going up.
But I really do think there’s much more likelihood that we see rates peak and start to gradually work their way back down than there is an opportunity for the rates to go back up to the sevens, or even worse, the eights. Look, there are people that are saying interest rates are going to go up beyond eight. There are also people saying the housing market is going to crash and we’re going to see 20% to 30% price declines. And I tend to think those people are trying to sell something and probably not something you want to buy. I actually got a Facebook message from one of my mother’s dear friends yesterday, and I’m not making this up. She actually sent me a message asking if the housing market was going to crash today.
So, somebody actually picked a date for the housing market to crash and it was all over the internet, apparently. And if you’re involved in real estate investing, if you’re looking to buy a house to live in, you have to look at things more rationally, more logically and, candidly, with a longer term view. Because market conditions can be very volatile day to day, but over time the housing market tends to recover and do very, very well.

Dave:
Thank you for explaining that. I think that I keep coming back to those two scenarios where on one hand the inflation improves, the Fed stops raising rates as quickly as possible, that brings mortgage rates down. On the other hand, the Fed keeps raising rates, but that causes a recession which lowers bond yields generally, and that also brings mortgage rates down. So, that’s why to me, I’m sort of in your camp where I just don’t see this crash scenario, because most of the paths and there’s a lot of uncertainty, but most of the different scenarios that can unfold result at least in a stabilization of mortgage rates, if not a falling of mortgage rates. And I know that it’s scary, because we did see this doubling, as you said, of mortgage rates. But there is now the strong potential that it’s going to at least stabilize a little bit.

Rick:
You know, Dave, I think people have to realize we’re looking at a really unusual set of circumstances. The Fed was worried for the last, gosh, five or six years that inflation wasn’t high enough. They had a target rate of 2% inflation and that was because everything in the economy was working. I mean everything in the economy was working, and then somebody bit into a bat in China and the next thing we knew the world had changed. And the government made a couple decisions that initially looked like they were good decisions, but turned out to be not great decisions from an economic standpoint in that we really overstimulated the economy dramatically. One of my friends who’s an economist said the government took a three trillion dollar hole and tried to stuff 15 trillion dollars into it.
So, we increased monetary supply by 50%, and for those of you who don’t follow economics, you follow baseball players in the back of their baseball cards. Overstuffing the monetary supply leads to inflation and you have to work your way down from that. The other issue is we overstimulated consumers, so everybody in the country seemed to get a stimulus check and unemployment benefits were enhanced dramatically, led to labor shortages, which led to wage growth and wage growth leads to inflation. And then we had supply chain disruptions because of COVID, which led to a supply and demand imbalance, so prices on everything went up. And Chairman Powell, the Fed has been very, very transparent in saying, “We underestimated inflation, we missed it, we whiffed.”
So, you had this once in a generation, hopefully, pandemic that screwed up the economy, the government overreacted to it, blew way too much stimulus into the economy, which always leads to inflation. And the Fed came on board to try and slow things down too late. So, they had to be overly aggressive. Again, we’ve never seen mortgage rates double in a year, never. And if things had not changed because of this unusual set of circumstances, we wouldn’t have seen mortgage rates go up to 7%. They would’ve gone up from these historically low levels, because that was part of the Fed’s stimulus to make sure that the housing market stayed stable and the economy stayed stable.
But we’re dealing with unusual circumstances that led to unusual spikes in mortgage rates and really the rest of the economy is still functioning pretty well. So, even if we do wind up with a recession next year, and I think it’s probably likely that the Fed will have already over-corrected and we’re going to wind up in one, it should still be a fairly short, fairly mild recession and shouldn’t have a long term or terribly negative impact on the housing market.

Dave:
Yeah, that’s a great point, because I wanted to talk about the state of the American consumer or homeowner. You have a lot of expertise in foreclosures and that side of the business. And from what I see, despite home prices coming down and some high profile layoffs with big well-known companies, it does seem like, generally speaking, American consumers are in a pretty decent position and homeowners in particular are still paying their mortgages. Is that correct? Are you seeing anything different?

Rick:
No, you’re spot on. We recently did a report on homeowner equity at ATTOM, and first of all, there’s still a record amount of homeowner equity out there, $29 trillion, nothing like that we’ve ever seen. And that’s on a housing stock that’s valued at about 41 trillion. So, if you look at the debt load that people are carrying, it’s actually really, really low as a percentage of the value of their properties. We found out that about half of homeowners are what we call equity rich, which means they owe less than half of the value of their home on their mortgage. And interestingly, 93% of borrowers who are currently in foreclosure actually have positive equity, which is completely the opposite of where we were back during the great financial crisis when a third of all homeowners were underwater and just about everybody in foreclosure was upside down.
So, even if we did have people in foreclosure, they have the opportunity to create a soft landing. So, if they were in a short-term position of financial distress, conceivably they could even refinance their loan with their lender if they’ve now kind of recovered. But even if they can’t, they have the opportunity to sell their home, because as we talked about earlier, there’s still demand. If you put a property on the market priced correctly, you’ll be able to sell it. But we don’t have a foreclosure problem right now. The normal level of foreclosure activity historically is about 1% of loans. So, that would be in today’s market, about 550,000 homes in some stage of foreclosure.
Instead we have about 260,000. So, we’re running at about half of historically normal levels of foreclosure activity and we’re running at about 60% of where we were prior to the pandemic. So, even though foreclosure numbers have been gradually edging up this year, we probably don’t get back to normal levels based on current rates of activity until sometime in mid to late 2023. So, keep in mind, we could double the amount of foreclosures we have right now and that would get us back to normal. And the loan quality over the last decade has been extraordinary. Lenders have taken on very little risk, borrowers have been highly qualified. And to your point, Dave, they continue to make their payments on time even if they’re underwater.
And I think that’s an important thing for people to keep in mind, because I’ve been fielding this question a lot lately. Just because a borrower goes underwater does not mean they go into foreclosure. The two are only marginally connected. And just to give you a data point, about 6% of homeowners today across the country are underwater on their loans. And I just mentioned a half a percent of borrowers are in foreclosure. That means the rest of those people are making their payments on time. And some of them have been underwater since the Great Recession and in markets that really never fully recovered. But they continue to make their payments because at some point they’ll be in positive territory.
And honestly in a lot of cases it’s cheaper for them to keep making their mortgage payments than it would be for them to mail the keys to the bank and try and find a place to rent. So, those two aren’t really connected. Now if you’re underwater on your loan and you wind up in foreclosure, it’s much, much harder to resolve that successfully. But being underwater is not what drives people into foreclosure. That’s still some sort of household financial catastrophe, a job loss, income loss, death in the family, divorce, unexpected medical bills, something like that is what sends people into foreclosure. You will start to read headlines, I promise you, about the looming threat of more and more borrowers being underwater as home prices flatline or go down.
And I had to walk a reporter off the ledge yesterday because of a report she read that she thought said 8% of borrowers were now suddenly underwater. And what it said was 8% of borrowers who took out loans in the last year with very low down payments who lived in markets where prices went down were now underwater. And I was like, that’s a fraction of a percent of borrowers. But the headlines will warn you that this looming crisis of underwater loans is about to overtake us. And sometimes it drives me nuts, but I guess it keeps me busy and that keeps me employed. So, it’s not a bad thing.

Jamil:
Rick, I appreciate the information and I couldn’t agree with you more with respect to the foreclosure situation and where we are just nationally with respect to equity and if there truly is vulnerability there. And I agree, I don’t believe that there really is. I think of course sensationalism will always sell or attract eyeballs, and so we’re going to see that always. But as a real estate investor and for the BiggerPockets community that love hearing your insights, Dave’s insights and my jokes, I want to understand where the opportunity lies, because here’s the fact for me. I’m a cash buyer. I’m predominantly wholesale, but I’m starting to hold property because what I’ve seen is that there is fatigue out there.
Sellers right now who have a situation, who have to sell, not your person who just wants to upgrade or move because they no longer like the size of their living room, or not just cosmetic things, but real reasons to sell. There’s fatigue in the market and I’ve been able to really take advantage of that fatigue and buy things. For instance, I was just telling Dave the other day, there’s a property in my neighborhood, it’s a $2 million plus neighborhood. This house was just appraised in July at 1,000,005 and I’m going to be closing on it in a couple days at one at 800 at 950, and I’m buying two in my neighborhood with the same situation.
And so I’m finding that fatigue and I’m taking advantage of that, because I’m a real estate investor and this is what we do. And all that equity that you described that homeowners are sitting on, they’re willing to trade that to release that fatigue, to be able to get out of the situation. That is one opportunity that I’m seeing. Do you see other opportunities that us as real estate investors can look at and pounce on in order to have a better footing going into the end of 2023 into 2024?

Rick:
So, I want to congratulate you for being responsible for the headlines people are going to see about home prices declining. So, good job Dave and Jamil. No, there are opportunities out there. This is the best time of the year to be buying typically, because there’s less demand in the marketplace. So, you have less competition for the assets that become available and homeowners typically are a little bit more willing to negotiate this time of year because of that lack of competition. So, just in general, somewhere between late November and mid-January in most parts of the country are the best times to look for those relative bargains. Second, if somebody’s selling right now, you have to ask yourself why they’re selling and if they have to sell.
So, you’re doing exactly the right thing. I personally think one of the reasons inventory levels will stay low for most of 2023 is because people who don’t have to sell aren’t going to sell. They’re perfectly happy to sit there with their 3½% mortgage and not trade it into a declining market for a more expensive house with a 7% mortgage. If they don’t have to do that, they’re not going to do that. So, if you do see somebody selling it at least begs the question of is this a forced sale? Do they have to sell? And if so, there’s some negotiating leverage there. So, I do think that that makes some sense. You want to keep following pricing trends. We’re looking at probably a 5% price decline nationally in home prices. Fannie Mae’s projecting next year, prices will go down January through December about a point and a half, and it’s going to be a very localized correction.
So, you have to pay attention to local market activity. For example, California prices will probably go down on average about 10%. The Bay area right now we’re seeing prices at some tiers go down 20% already. But if you’re in the southeastern states, you may not see prices go down at all, because you’re still seeing population growth and job growth. So, prices may not be going up 20% a year, but they might still be going up 2% to 3%. So you have to look for those local market opportunities and figure what the right mix is for you. And again, if you’re in a market with declining prices, you might be looking at buying a property to rent, because you don’t need to be worried about immediate home price appreciation. If you’re looking at a market where prices are going up, maybe it’s a better flipping opportunity, because flippers really need price appreciation to make their numbers most of the time.
The other opportunity, we mentioned that there aren’t a ton of foreclosures, but if you’re going to be playing in that market looking for opportunities, you have to change the model, at least in your mind, from where we were during the last cycle. We mentioned how many borrowers were underwater on their loans last time. That meant that they couldn’t get rid of the property unless the bank agreed to a short sale. And there were a lot of them, but not many relative to the number of people in foreclosure. A lot of the properties didn’t sell at the auctions because the banks couldn’t price them low enough for investors to make the numbers work. So, the bank banks wound up repossessing the majority of properties in foreclosure, and so it made sense an investor to wait for the bank to repossess it, wait for the property to come back to market and negotiate then for those bank owned properties, those REOs.
That’s not happening this time. I mentioned that foreclosure activity overall is at about 60% of pre-pandemic levels. REO activity, bank repossessions are at about a 30% level of where we were prior to the pandemic. So, what we’re seeing is more foreclosure starts, but more people selling their homes in the early stage of foreclosure before the foreclosure auction. And the properties getting to the auctions are selling through at about a 70% rate, which is about twice the rate they usually sell through. So, there’s less properties getting to auction, there’s fewer properties getting past the auction, going back to the lenders. And the FHA has this program called CWCOT, more inside baseball stuff, conveyed without clearance of title, and any FHA property that doesn’t sell the auction is then assigned to an online auction company for a second chance sale, at which point they typically lower the prices a little bit.
So, if you’re an investor waiting for REOs, waiting for bank owned properties, that’s not where the opportunity is going to be this time. This time you’re going to have to find those borrowers in the early stage of foreclosure and if you can’t work out a deal with them before the auction, you need to be ready to go at the auction. And that’s where somebody like you, Jamil, comes in as a cash purchaser because most of those auctions require cash or cashier’s check. And today’s market, you’re in a tremendous position of advantage if you’re a cash buyer, because everybody else is looking at 6½, 7% traditional mortgages and investor loans that have a 10 to 12% handle on them right now if you’re getting bridge financing. So, there are still opportunities out there, but you’re going to have to do your diligence.

Dave:
Well, thanks Rick, that’s super helpful. I think that there’s a lot of fear out there, again, with headlines and you offer a much more sober opinion about what’s happening and a really good analysis of where the opportunity lies. Before we get out of here, I do want to ask you about something you mentioned when we were just chatting before the show, which is that at ATTOM, the company you work for, released a report about fix and flip activity. Could you tell us a little bit about what you’ve learned?

Rick:
Yeah, and for anybody who’s interested, we have a market insights section on our website where we post all these reports for free. So, not even something you have to pay for, but we recently did release the fix and flip report that covered flips in the third quarter of 2022. This was a classic good news, bad news report, Dave. The good news is that there were over 92,000 flips in the quarter, which is the third highest number on record. And we’ve been looking at data for the last 22 years, so that’s a pretty good number. The bad news is it’s the third consecutive quarter where that number has gone down. So, the trend is for fewer flips and the really bad news is that both gross profits and gross profit margins have gone down, and gross profits are simply the price the property sold for versus the price it was purchased for.
And then margins are the percentage that that profit represented compared to the original purchase price. So, that doesn’t factor in things like material costs, labor, financing, and we know all those costs have gone up. So, it’s not an ideal market for flippers. Ideal markets have high demand, low supply, and rapidly appreciating prices. And the cherry on the sundae there is low finance rates and we’ve seen all of those conditions, we still have demand, but it’s weakened. Prices have flatlined or in some cases are declining, it’s more expensive to finance, it takes longer to sell, and the material and labor costs along with financing costs are all higher. So, if you’re in the fix and flip business, you really need to be good at math right now.
You need to be incredibly careful not to overpay for the property that you’re buying. You have to be really, really careful not to underestimate the cost of repairs, not to underestimate the length of time it’s going to take you to move the property. And by the way, we’re not talking about markets where it’s taking 60 or 90 days to sell a property when it’s ready to go. We’re still looking at a couple weeks in most markets, but that’s up from a couple days last year. So, you do have to figure in those carrying costs. I don’t want to pick on anybody, but you know it’s a difficult market when you have a Zillow Offers lose $352 million in a quarter and then Opendoor makes that look like chump change by losing a billion dollars.
And again, those aren’t really fix and flip models, those are arbitrage models, but it just shows you what can happen if you get your pricing model wrong and you do it at scale. You make a mistake on one house that’s maybe thousands of dollars, you make the mistake on thousands of houses and that’s hundreds of millions of dollars. So, it just shows you that even companies that you expect to be a little bit more professional, a little bit more sophisticated in their models, make mistakes, make big, big, big mistakes and wind up laying off a third of their staff because of those mistakes. So, it just does go to show that as a flipper, you really, really need to have your pencil sharpened this cycle.
And it’s a cautionary note for people that are just getting into this part of the business. Timing of market can be difficult, but if you pick the wrong time, buy at the top of the market and underestimate your repair costs, you’re looking at a pretty nasty scenario for that flip. So, it’s a good time to be engaged with somebody like BiggerPockets where you can get a lot of the education, you can get a lot of the tools and products you need to make sure you’re doing the right thing. And certainly always be listening to On the Market Podcast, because that’s where you get all the right information.

Jamil:
Rick, thank you so much for that insight. I wanted to just dig in a little deeper, and speaking from my own personal experience with a number of flips, we’ve got a dozen of them that were going on and we saw that in the price point between 750 to a million and a half, demand was gone. We had to write checks to exit those deals and get them off the books. However, in the starter home, that first time home buyer price point, those properties are still trading and actually there’s still a great amount of demand. When you guys were putting together that report, did you find those differences and is there a subsection within the fix and flip market that people in the business might be able to focus on so that they could still weather this storm out and tread water and not lose their crews and fold up until things start to come back?

Rick:
Yes, but before I go there, let me throw out another scenario for you, and I know you do this. You mentioned it earlier. A typical flipper might have a hard time making the numbers pencil out these days, but there’s an opportunity for rental properties. I think we mentioned earlier that about 10 to 20% of people who thought they were going to buy have decided to rent instead. You can make a logical argument that if they wanted to buy a house, they might prefer to rent a house rather than an apartment. Maybe they have needs for more room, whatever.
So, there’s still an opportunity for single family rental properties and I think that opportunity will continue to grow. Now, if you’re a flipper, you may not have processes and business procedures in place to become a rental property owner, but you can certainly identify those properties and maybe become a wholesaler and find those properties that are opportunities and sell them to people that want rental properties and make some profits doing that without the risk of buying, repairing and holding that property. So, that’s one opportunity.

Jamil:
And I never paid you to say that, by the way.

Rick:
No. It’s a real world opportunity right now, and there are some flippers who actually in the short term, because their volumes aren’t huge, become rental property owners, because the skills needed to find, buy and repair a house are the same. Now it’s just a question of being that landlord on a short term basis, maybe even finding somebody to do that. But that said, to your original question, I’m speaking in very broad general terms here, Jamil, but we’re seeing the same thing that you’re seeing in your market. That at the higher end demand has dried up a little bit more significantly than at the entry level. And that’s pretty much true across the country. There are probably a few outliers here and there, but generally speaking, that is what we’re seeing. There’s very little entry level inventory.
So, if you find a property that you can bring back to market as a rehabbed repaired property, you’re probably going to have good opportunity to sell it and sell it at a reasonable price. You also have more competition, because that’s where the bigger institutions are looking for rental properties. That’s where the single family rental, smaller investors are looking for properties. And obviously that’s where first time buyers are looking for properties. So, it’s not easy to find those properties to buy and fix, but if you’re looking at a section of the market that’s healthier than others, that entry level, and I’d even say in a lot of markets going up to the mid-tier, you’re still seeing a pretty fair amount of demand.
It’s once you get into the upper mid-tier and the higher level properties that you’re seeing, actually, you’re seeing two problems. You’re seeing market demand lessen, but you’re also seeing the weakest prices in terms of appreciation at those higher levels. That’s why places like San Francisco are seeing a more significant price decline in places like, I don’t know, Des Moines, Iowa.

Jamil:
Thank you.

Dave:
Rick. I think we could do this all day, but we do have to get out of here soon. Is there anything else you think our audience should know as we head into the new year that we haven’t covered yet that you think is important for them to keep in mind?

Rick:
Gee, I don’t know. We’ve talked about investment strategies, the economy, the housing market. I guess my parting thought would be, beware of the hype. You’re going to read a lot of gloom and doom stuff. You probably have listeners who are waiting and salivating for that market crash that the knuckleheads on YouTube are breathlessly promoting. And I would say don’t wait. Timing the market is almost impossible. If you do your math and the numbers pencil out, it’s time to move forward. And that’s true whether you’re looking to fix and flip, buy rental property, or buy a house to move into. It’s an interesting scenario in that if you can find a property you can afford that you’re going to hold for a while, you can actually see a scenario where two years from now, your monthly payments are lower than what they are today, and that’s not something you’re likely to see if you’re going to rent a property, because your rental price is going to go up pretty much every year.
So, I do tell people, particularly people that are going to hold a property for a period of time, that if you find something that the numbers work, don’t wait for the market to bottom out. You can live with a little bit of short term volatility. Your prices go down 2½, 3%, 5%, they’re going to come back up. And historically you go back the last a hundred years of home prices, we’ve only had one time where the market fell 20% and stuck there for a while and that was the Great Recession. But home prices don’t go up every year, but over time, they’ve gone up consistently year, over year, over year. So, don’t believe the hype, don’t panic, but be as careful as you possibly can before you make those decisions. Don’t overthink it, but make sure you do that math and check it twice.

Dave:
All right. Well, thank you, Rick. We appreciate those parting words and definitely agree. People should be… At least read the whole article, right? There’s so many times where it’s just people react to the headline and it’s like, “Well, did you read the rest of the article? It wasn’t that bad.” So, great sober advice there. We appreciate it, Rick. Rick Sharga is the Executive Vice President of Market Intelligence at ATTOM Data. Rick, if people want to connect with you, where should they do that?

Rick:
So, you can find me on LinkedIn or Twitter, Rick Sharga, either one’s pretty easy. If you want to connect with me on LinkedIn, make sure you mention On the Market or Jamil and Dave so that I know you’re not one of the crazy people on LinkedIn reaching out under an alias. You can also find, I mentioned attomdata.com. We have a market insight section. We’re all over social media, but we publish reports on all aspects of the housing market that are free every week. So, feel free to follow us there, and I look forward to connecting with a lot of you.

Dave:
All right. Thanks again, Rick. We’ll have to have you back in six months. You said the second half of 2023 might be very different, so we’ll always have you back at these pivot points for the housing market if you’re willing to join us again.

Rick:
Always enjoy the conversation guys. Anytime.

Jamil:
Well, you heard it guys. Rick said be a wholesaler in the new year. What do you think, Dave?

Dave:
I can attest that at least off air, I haven’t seen Jamil pay Rick to say that.

Jamil:
No.

Dave:
He might have done it privately.

Jamil:
It’s a real thing. I think there’s amazing opportunities, and especially if you guys are looking at strategy for a 2023, really consider it and have conversations with folks in the forums. Talk to people on BiggerPockets and really, really get your minds right, understand underwriting, and figure out the numbers. Like Rick said, sharpen the pencil and you will succeed.

Dave:
I love that this is our first show for the new year, because I just think Rick provides really good information that’s not overly rosy, but he does point out that there is opportunities and that a lot of the things that you’re reading are mostly fear-based and not actually fact-based. So, if you are looking to grow your portfolio or get into real estate for the first time in 2023, hopefully you got a lot of good lessons from what Jamil and Rick have shared with you today. It feels weird, because we’re recording this in the middle of December, but I guess happy New Year to everyone listening.

Jamil:
Happy New Year.

Dave:
We really appreciate you. We’re going to have a very good year. We have a lot lined up for you on On the Market. We appreciate all of you listening, and best of luck to all of you in your real estate investing and economic situations in 2023. Jamil, where should people find you?

Jamil:
You can find me on my YouTube channel at youtube.com/jamildamji. Check me out on IG as well. I kind of feel like, Rick, it makes sense that he’s on LinkedIn and Twitter and I’m on Instagram and TikTok.

Dave:
Yeah, that does it. That tracks. It’s on brand for sure.

Jamil:
Happy New Year guys.

Dave:
Absolutely. And we do also have a YouTube channel for On the Market and BiggerPockets. You can check those out if you want to hear more from me, or Jamil, or any of the other On the Market panelists. For everyone else on On the Market, for James, Kathy and Henry who cannot be here today, happy New Year and thanks for listening.
On the Market is created by me, Dave Meyer, and Kailyn Bennett. Produced by Kailyn Bennett. Editing by Joel Esparza and Onyx Media. Research by Pooja Jindal. And a big thanks to the entire BiggerPockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Watch the Podcast Here

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In This Episode We Cover

  • The interest rate “reprogramming” and why rates don’t need to hit rock bottom for a buying frenzy to start again
  • Mortgage rate predictions and what could happen that would cause rates to spike in 2023
  • The latest foreclosure data and why homeowners being “underwater” isn’t what you think
  • The best opportunity for real estate investors and the revival of wholesaling in 2023
  • Bad news for house flippers and why profits are starting to drop for home renovations
  • The “short-term pain, long-term gain” of real estate investing in 2023 (and beyond!)
  • And So Much More!

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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