Swift Increase in Foreclosures, Surging CRE Delinquencies—What’s the Cause?

Home foreclosures are on the rise, raising questions of a housing collapse and real estate investors’ predicted buying frenzy or simply an anomaly?

Since interest rates increased with the home affordability crisis, foreclosure rates have steadily increased. According to Redfin’s analysis of 2023 U.S. home listings that could be affordably purchased by U.S. households financially in 2023, foreclosure filings have skyrocketed 8% according to data firm ATTOM’s new report.

According to the report, certain states are experiencing REO numbers that haven’t been seen since 2008’s housing crash: Nevada saw the highest annual increase in foreclosures during February 2024:

South Carolina: Up 51%, Missouri: Up 50%, Pennsylvania Up 46% and Texas Up 7% with Indiana Up 0.8%
Rob Barber, CEO at ATTOM stated in a press release about their report, that an annual increase in U.S. foreclosure activity points to shifting dynamics within the housing market and suggests “that it could signify shifting financial landscapes for homeowners, leading them to adjust market strategies and lending practices. We continue to closely track these trends to understand their full effect on foreclosure activity.”

However, this probably isn’t the start of an economic collapse through foreclosures; although annual increases don’t represent widespread foreclosure epidemics across states. Indeed, 28 states saw annual decreases in foreclosures annually which indicates that U.S. foreclosure trends could be changing with employment being an important factor.

However, should high interest rates persist and more adjustable-rate mortgages adjust upwards, we could witness an upsurge in foreclosures even in states with higher employment levels.

Large Cities Are Feeling the Pinch
Big cities aren’t immune from foreclosure. Higher loan amounts combined with tighter short-term rental laws could play a part in why urban areas with populations greater than 200,000 saw more foreclosures in February 2024 than expected. Here are the numbers from five cities as of February 2024:

New York City had 1,367 foreclosure starts; Houston: 998; Los Angeles: 808 and Chicago – 792
Miami: 777 Foreclosure Starts
One likely reason for an increase in foreclosures may be market forces playing catch-up since pandemic moratoriums permitted delinquent homeowners who lost their jobs during 2020 to remain in their homes temporarily despite delinquency issues; these restrictions have since expired resulting in owners losing their properties and facing possible foreclosure proceedings.

An Opportunity for Negotiation
Although foreclosures have become less frequent nationwide due to affordability issues, in certain markets there has been only a limited pool of buyers ready to purchase homes at retail prices. Unfortunately, banks have been unwilling to negotiate significant discounts.

However, “it should be noted that an increase in foreclosures could bring with it an increase in distressed properties on the market that create a buyer’s market,” according to Michael Branson of All Reverse Mortgage for Yahoo! Finance. “This could drive prices or rental costs down over time while offering great opportunities for investors or those seeking homes for purchase.”

Commercial Foreclosures: Fire Sale Recent turmoil in the commercial real estate market has lead to widespread foreclosures, giving cash-rich investors ample opportunities to pick up multiple deals at bargain prices. Just like single-family home lenders offered underwater investors extensions and modifications on empty office buildings, apartment complexes, and hotels needing repair because of rising construction costs or supply chain problems.

Now their patience has worn thin. Rising interest rates have rendered floating rate debt unpayable for investors; as interest rates skyrocket further and investors with floating rate debt find they cannot make payments, savvy buyers who waited out the pandemic will seize this momentous opportunity to profit.

Rich Banjo, co-president of Artemis Real Estate Partners – which acquired distressed properties through a $2.2 billion fund that closed last year – told the Wall Street Journal, that having dry powder can be invaluable during these challenging economic times.

Cash-Rich Investors Are Mopping Up
According to a Wall Street Journal article, global real estate funds operated by private equity firms were holding $544 billion as of the second quarter of 2019, an all-time record and up from $457 billion at the end of 2022 according to data firm Preqin; most of this money is dedicated to finding distressed real estate assets.

Harbor Group International of Norfolk, Virginia recently spent over $660 million purchasing seven apartment building developments across seven cities–including Pine Ridge and Locklyn West Palm in West Palm Beach, Florida–that were struggling to attract tenants. According to data firm Trepp, with $2.2 trillion scheduled to mature between now and the end of 2027 due to commercial mortgage maturities slated for maturation over this timeframe. Their spending spree could mark the beginning of an incredible commercial real estate buying spree!

Small investors could gain from joining forces and pooling smaller apartment building deals that face similar financial hurdles as larger players.

Without the support of interest rate reductions, expect an upsurge in foreclosures across both residential and commercial real estate markets, especially single family homes and office/retail property. Assuming the economy continues to be strong and unemployment remains at low levels, we can likely expect the Federal Reserve to hold off on raising rates to combat inflation for now.

Commercial real estate has already reached the point of no return and threatens to burst. Single-family and small multifamily real estate face the same peril, but without jobs matching interest rates foreclosures will continue their upward spiral – it is during these moments of distress when syndicators and deep-pocketed investors make fortunes.