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Foreclosures: What to expect in a recession

When a recession occurs, it affects many facets of real estate including foreclosure rates. Homeowners have more equity than in 2008, and economists and experts aren’t predicting a wave of foreclosures, however there’s always a chance we’ll see an uptick in foreclosures. 

So, what does that mean for today’s homeowners and those that are looking to buy and sell? 

Foreclosures in real estate 

A foreclosure is never a good thing for a homeowner. Not only does the person lose their home, it also severely damages their credit making it difficult for them to qualify for loans and find alternate housing. 

For buyers, when homes are foreclosed on, they often sell well below market value. This is because they are usually priced by the lender who wants to get a return on the loan quickly. 

There are also instances when the buyer may short sell their home to avoid a foreclosure. They will want the home sold quickly before a foreclosure occurs. They will often throw in perks to get the home off their hands including reduced pricing, low down payments and interest rates and the elimination of closing and appraisal fees. 

However, those who buy foreclosed homes take a risk as they are usually sold in ‘as is’ condition. There may also be property problems and hidden costs involved. There’s also typically a lot of competition for a home that’s been foreclosed on.  

What will the status of foreclosures look like in a recession? 

During times of recession, foreclosures tend to increase. Prices go up making the cost of living less affordable. As a result, many people are unable to pay their mortgages and end up foreclosing on their homes. 

This was a trend that came to light in the recession of 2008. But experts are saying the current recession won’t result in nearly as many foreclosures and here’s why. 

Stricter lending practices: Lenders have learned from the past and have tightened their belts when it comes to whom they deem eligible for loans. Today’s borrowers must have high credit scores, acceptable debt to income ratios and a good amount to invest in a down payment.

This compares to the early 2000s when a combination of unethical lending practices, cheap debt and complex financial engineering allowed borrowers to be approved for mortgages they couldn’t afford. 

People are in better shape economically today: Although the pandemic has hurt the economy, people are recovering quite nicely. 93% of jobs have been recovered and there is currently a low 3.6% unemployment rate. Most American households have also rebuilt their net worth, so it is now at pre-recession levels. 

America was in much worse shape during the 2007-2008 recession as about 9 million Americans lost their jobs around that time period. Median U.S. household income declined by about $2,000 annually on average between 2007 and 2009 and an estimated 3.9 million homes were on the brink of foreclosure.  

More home equity: Today’s homeowners are seeing a rise in home equity. There was a $3.2 trillion increase in home equity in 2021 alone. This is accompanied by household incomes that are about 40% higher than they were in 2006. 

A rise in equity means homes are worth more now so owners have an easier time selling their existing homes and getting enough money to pay off their mortgages in full so they can avoid foreclosures.