Why foreclosures are still below pre-pandemic levels

According to the most recent credit data from the New York Fed, foreclosure data for the housing market is still below 2019 levels. Although foreclosure rates rose in the last quarter, we are far from the stressful levels that we saw during the run-up to the housing bubble crash in 2008.

Credit data in general doesn’t look great when accounting for credit card debt, auto loans, and student loan debt — all have had an increase in their percentage on 90-day lates. But in general terms, homeowners’ financials are solid as a rock. Let’s review the data.

Foreclosure data

The chart below illustrates that foreclosure data showed little stress for many years prior to the onset of COVID-19, and it has continued to perform well since then. Post-Covid for many years, levels were abnormally low and we should have returned to pre-pandemic levels by now, even with foreclosure prevention programs in place. 

Late-cycle lending risk is always a factor in every economic cycle we experience in the housing market. However, as shown below, the housing credit situation in 2008 had already begun to deteriorate years before the Great Recession started. In contrast, the current state of housing credit appears to be much healthier when compared to credit cards, auto loans and student loan debt.

FICO score data

The FICO score data for housing has been impressive since the Qualified Mortgage (QM) laws were implemented after 2010. The majority of people in the country are obtaining 30-year fixed loans, which provide stable debt costs. With rising wages, cash flow for most homeowners has been stable for the past 14 years.

When I consider why the U.S. has avoided a recession since 2010 (excluding the impact of COVID-19), I believe the QM mortgage law and the 2005 bankruptcy reform law have played significant roles. These laws helped moderate household credit expansion, preventing consumers from over-leveraging on a large scale. They have truly been the unsung heroes of the U.S. economy in this century.

Conclusion

While there are signs of credit stress in credit cards, auto loans, and now student loan debt showing up again in delinquency data, homeowners, at least on paper, appear to be in a stable position overall. Unfortunately, when the next recession occurs, renter households are likely to bear the brunt of the impact. On the other hand, homeowners not only tend to have strong credit scores, but they also possess a significant amount of equity in their homes.

We monitor all credit housing data and new listings closely to keep everyone informed about any potential housing credit stress. During the housing bubble crash years we had near 15 million loans in delinquency, which meant we were about to have a lot of foreclosures happening and as home prices were falling, a lot of home equity was lost. Now, most homeowners have a ton of equity to sell and almost 40% of homes in America don’t even have a mortgage.

Currently, new listings are trending back to normal levels, similar to those we observed before COVID-19, where seasonal peaks ranged from 80,000 to 110,000 per week. During the years of the housing bubble crash, this index was operating between 250,000 and 400,000 listings per week for several years. Now that the credit markets have improved, we do not see any stress reflected in the data.