How Rising Foreclosures Are Reshaping the Real Estate Market

After years of historically low foreclosure rates, the US housing market is seeing an uptick in borrower defaults and subsequent foreclosures. Higher interest rates, economic uncertainty, and stretched consumer finances have contributed to a rise in mortgage delinquencies and lender-initiated foreclosures, marking a reversal from the pandemic-era lull.

This shift has broad implications for the market that go beyond damaging the credit scores of those who are facing foreclosure. Rising foreclosure rates also impact home prices, affordability, and neighborhood stability. With this in mind, whether you’re buying or selling, you need to be aware of this change in the market and how it could impact your future transactions.

What’s Driving the Increase in Foreclosures

The affordability crisis in the United States certainly isn’t new, but the ripple effects that it causes are reaching further into households across the country. After an extended period of historically low interest rates during the pandemic-era, the Federal Reserve’s rate hikes have led to higher borrowing costs that persisted through most of this year. While the Fed has reduced rates over the last few months, this does little to benefit homeowners who purchased their homes over the last 18 to 24 months.

When combined with ongoing inflationary concerns, these higher costs have left millions of borrowers struggling to make monthly mortgage payments. According to data from the Lender Processing Services (LPS), total foreclosure starts and bank repossessions have increased year-over-year, particularly in regions where house price growth has slowed or reversed.

Industry analysts have also pointed to the expiration of many of the programs that were put in place during the pandemic to protect borrowers from foreclosures. With more aggressive lender enforcement resumed, loans that once could be deferred or modified are now proceeding into foreclosure if borrowers cannot meet obligations.

How Rising Foreclosures Influence Home Prices and Inventory

A rise in foreclosures can impact local housing markets in multiple ways. Over the last few years, many markets have been experiencing an inventory crisis, which happens when there aren’t enough available homes to meet demand. More homes coming onto the market, even if it's by foreclosure, can relieve inventory shortages that have suppressed affordability for several years. Buyers who were previously priced out might find opportunities in properties sold at distressed prices, especially in areas with elevated supply.

However, this surge in inventory can spell disaster for buyers, especially if there are multiple foreclosures in a concentrated area. If the homes being put on the market were listed by owners looking to move, the prices would stay relatively close to the market average. However, banks tend to list foreclosed properties for lower-than-normal prices. Banks aren’t in the business of owning homes, and when they’re left holding a foreclosed property, they lose money. It’s common for banks to sell foreclosures for thousands less than the property is actually worth simply to get it off their books.

That said, the broader national impact on home prices has so far been less severe than some feared. With overall inventory still constrained relative to pre-pandemic levels in many regions, rising foreclosures have added stock without necessarily triggering a nationwide price collapse. Instead, their impact tends to be localized, with greater effects in markets where economic conditions are weaker, demand is soft, or home values have stagnated.

Opportunity With Caution: The Impact on Homebuyers

For homebuyers, especially first-time buyers, rising foreclosure rates can have a positive impact on housing affordability. Since foreclosed properties are priced lower than other homes in the area, buyers can find quality homes for a fraction of the price. Depending on the property’s condition, buyers who are willing to do some DIY work can save even more.

Still, purchasing a foreclosed home comes with some risk. Banks typically don’t entertain offers that come with contingencies, which means prospective buyers usually have to waive the right to an inspection and other protections that are put in place. When a home is sold as-is, the buyer assumes all the risk. Appraisals on foreclosed homes can also be complicated by distressed comparables, and financing may require higher down payments or stricter underwriting, especially for fixer-uppers.

This means that prospective buyers should approach foreclosures with some caution. While there’s certainly an opportunity to save money, you may ask the bank if you can pay for an inspection before submitting an offer. Additionally, it’s wise to pay for title research to ensure the property can be legally purchased. Finally, spend some time researching your financing options to make sure that you’re truly getting a good deal.

No Need for Panic: How Foreclosures Affect Sellers and Homeowners

When it comes to foreclosure impact, it’s easy to assume that sellers need to panic, but that’s not necessarily the case. If you’re selling a home in today’s market, you may not be directly impacted by a rise in foreclosures. It’s important to remember that the rise in foreclosure rates is on a national scale. It’s incredibly rare for multiple homes in a specific community to be foreclosed on, which means you may not be facing any more direct competition than you were when you initially listed your home.

That doesn’t mean that some buyers who would have been interested in your home may not shift their focus, though. Buyers who weren’t committed to purchasing in a specific neighborhood may expand their search in order to find cheaper options.

Homeowners who aren’t actively trying to sell their home also face some potential difficulties. Borrowers with adjustable-rate loans or upcoming resets may face the greatest pressure. If interest rates rise again or lenders tighten credit standards, some homeowners may find refinancing difficult or cost-prohibitive, heightening default risk. Meanwhile, those who lost equity during recent market corrections have less financial cushion to absorb economic shocks.

Change Is Coming

A rise in foreclosures points to a noticeable shift in the US housing market, which has been in a state of flux for the better part of the last five years. There’s going to be a rise in inventory as more and more homeowners find themselves unable to afford their mortgages. However, this also means that there will likely be more renters entering an already-crowded market, as those former homeowners look to rebuild their credit. No matter where you are in the housing market, this news could impact you, but being informed can help you set yourself up for success.