The effect of the 2023 housing market slowdown on increasing foreclosures
Foreclosure.com Scholarship Program Winning Essay 2023, (Grand Prize)
By Reem Miri | The University of Arizona
Introduction
The housing market is changing a lot as the very strong market during COVID-19 cools down in 2023. Home sales are dropping and prices are slowing down after over 2 years of big increases. Many experts wonder how these changes will impact homes going into foreclosure in the future. Some important money reasons likely add more foreclosed homes in 2023. These include high inflation, mortgage rates spiking leading to payments many people cannot afford, and special COVID rules to pause payments ending. This essay talks about expert views on how those money factors may gradually or suddenly increase foreclosures. It also covers ideas policymakers could use to help families having trouble with mortgage payments they cannot control.
Factors Accelerating 2023 Foreclosures
This section examines the key economic dynamics projected to expand the number of homes entering foreclosure over 2023.
Rising Prices Squeeze Homeowners Already Strained
Persistent elevated 7%+ inflation throughout 2022 has driven up costs broadly across categories like groceries, gasoline, apparel, electricity, and shelter (U.S. Bureau of Labor Statistics, 2022). These widespread increases have drained family budgets and forced difficult tradeoffs to cover essentials. Survey data indicates 29% of homeowners have cut recurring expenses and pulled from savings just to afford regular needs amid high inflation (Bank of America, 2022). If prices continue rising faster than incomes into 2023 as anticipated, savings drawdowns become unavoidable for more families just to pay for basics month-to-month.
With more households exhausting their financial reserves to counter inflation, fewer have leftover contingency funds to handle emergencies. Job losses, major home repairs, illnesses, and other shock events become very hard to absorb without available backup savings. According to research from the JCHS, the median US household holds less than $6,000 in liquid assets– equivalent to less than two months of essential spending at current inflation rates (JCHS, 2022). These slim buffers could quickly evaporate amid crisis events, leading families to miss housing payments within 60 days post-disruption (CFPB, 2022). Missed payments often activate foreclosure proceedings within 4–5 months (CFPB, 2022). So inflation-induced savings erosion makes small disruptions more likely to spiral into mortgage distress.
Refinancing Boom Sets Stage for 2023 Payment Issues
In 2020–2021, roughly 19 million borrowers took advantage of ultra-low mortgage rates under 3% to refinance their homes and obtain lower monthly payments (ATTOM, 2022). This unprecedented refinancing boom delivered hundreds of dollars in monthly savings to enable more households to budget manageably for housing expenses amid uncertainties. However, with broader inflation accelerating, average 30-year fixed mortgage rates have now spiked from under 3% up to over 6% in late 2022– representing the most drastic yearly rate rise since the 1980s (Freddie Mac, 2022).
This sudden rate surge translates to significant payment shocks for recent refinancers. According to data from the CFPB, the median refinancer in 2020–2021 likely more than doubled their housing expense ratio– the portion of income spent on mortgage costs (CFPB, 2022). Research indicates this ratio exceeding 30% often stretches households beyond capacity, especially when rising quickly. One estimate projects over 75% of pandemic-era refinance loans may now face unaffordable payment burdens given the ultra-fast rate spike ahead, heightening risks of borrowers missing payments (Odeta, 2022). These distress indicators then show up in rising foreclosure starts around 3–6 months post-delinquency.
COVID Protections Expiration Driving Distressed Inventory
The imminent expiration of special COVID-era foreclosure protections, including forbearances allowing distressed borrowers to halt payments as well as outright foreclosure moratoriums, will tangibly contribute to rising foreclosure inventories in 2023 (ATTOM, 2022). Forbearance plans enabled over 13 million homeowners who lost income during the pandemic to pause payments without penalty, providing vital temporary relief (Urban Institute, 2023). Meanwhile, moratoriums instituted by mortgage giants Fannie Mae, Freddie Mac and others fully banned lenders from initiating or advancing any foreclosure actions on covered loans from March 2020 until mid-2022 (JCHS, 2022).
These interventions essentially restricted the supply of homes progressing to foreclosure, even as mortgage delinquencies swelled, and provided breathing room to financially distressed households. However, eligibility for new forbearance enrollments ended in 2021 and maximum lengths top out at 24 months. So programs allowing missed payments are universally set to expire in 2023 (CFPB, 2022). With protections terminating but no meaningful improvement in broader economic uncertainty or high inflation, many homeowners still struggling to pay face foreclosure without alternatives. This creates direct pipeline to amplify foreclosure starts just as extraordinary government relief fades.
Already stretched thin households increasingly missing mortgage payments underscores the risk. Over 75% of homeowners exiting forbearance following pandemic protections have needed loss mitigation actions to avoid immediate foreclosure referral, suggesting still-precarious finances (MBA, 2022). As programs expire, missed payments left unresolved lead directly to formal foreclosure action. One study estimates as many as 1.75 million homeowners remain economically vulnerable to expenses rising quicker than incomes even with jobs, implying hardship may continue mounting in 2023 (Odeta, 2022). Ultimately the forbearance sunsets could drive a large backlog of distressed properties into active foreclosure.
Debate Over Pace of Rising Foreclosures
Consensus clearly expects elevated foreclosure volumes in 2023 after protections supporting delinquent borrowers expire and economic uncertainty lingers (Fannie Mae, 2022; Freddie Mac, 2022). However, expert opinions diverge regarding the precise monthly pace of distress accumulation as the year progresses. Some economists anticipate gradual additions initially as homeowners leverage built home equity or sell into still-solid prices to delay foreclosure starts until no options remain during 2023’s projected micro-recession (Zillow, 2022).
Median home values remain nearly 40% higher nationally than before the pandemic in 2019 on average, granting struggling owners more temporary cushions to utilize in early distress before surrendering properties (Redfin, 2022). Additionally, projected modest 1–3% price corrections could empower pre-foreclosure sales to exit ownership without requiring bank seizure of homes. Both dynamics may slow the onset of rising foreclosure actions while families exercise alternatives.
Yet the ultimate expiration of COVID forbearances seems likely to overwhelm marginal protections for many vulnerable owners as 2023 continues, rapidly expanding foreclosure volumes later in the year. Over 70% of homeowners in active forbearance pre-expiration rely on loss mitigation to avoid immediate foreclosure referral today in already tightened economic conditions (MBA, 2022). Eliminating accommodations raises risk of distress cascading into bank repossessions rather than resolutions. This combination of trends points to muted inauguration followed by swelling inventories as resilience mechanisms tap out across the year for owners without meaningful financial turnarounds post-pandemic.
Combating Hardships Through Proactive Policy Solutions
All types of government can lessen risks directly for homeowners who may lose their houses as the economy gets weaker after COVID-19 caused big money problems for many families. States can design help plans just for their residents that give what is needed most locally. But federal plans can also better coordinate national help instead of state-by-state efforts (JCHS, 2022). Economists say governments should act quickly but also carefully to support at-risk families before growing money issues make them lose their homes.
Potential impactful solutions backed by research include updating outdated unemployment insurance provisions to allow more flexible duration of benefits in recognition of increasingly dynamic job switching (AARP, 2022). Providing more income replacement support could better help cover gaps when people lose jobs, before they then struggle to pay their mortgages (Galante et al., 2022). Also, having dedicated financial resources that offer short-term mortgage principal reductions or delayed mortgage payments directly lowers unaffordable payments without damaging credit or home ownership. Distributing aid money only when specific hardships happen can help more families continue affording homes during temporary problems. Meanwhile, even reduced mortgage payments in loan modifications incentivize people to keep paying and make default less common. One study found people were 35% less likely to re-default when given small monthly rewards for one year of lowered but consistent payments (Urban Institute, 2023). Lastly, reworking post-break mortgage repayment plans around current incomes instead of outdated terms adapts to people’s changed budgets. Overall, these targeted solutions deploy money when vulnerability becomes reality yet maintain homeowner control.
Conclusion
In summary, the slowing housing market and unique money struggles in 2023 seem ready to cause more homes to be foreclosed on over the next year. Policymakers should watch closely communities at risk and make sure enough help is available as homeowners become unable to pay. With good planning, communities can reduce the harm to homeowners across the country from these money issues. Carefully chosen policies and more support could shield struggling owners from the worst effects. While it likely won’t be as bad as the 2008 foreclosure crisis, the coming months will undoubtedly see more homeowners unable to pay as people’s ability to manage money problems gets weaker. Controlling the hardships this newest wave of foreclosures causes is important to stabilize affected families and communities nationwide.
References
ATTOM. (2022). Home Equity and Refinance Report. https://www.attomdata.com/news/market-trends/home-sales-prices/attom-q4-2022-u-s-home-equity-and-underwater-report/
Bank of America. (2022). Homebuyer Insights Report. https://about.bankofamerica.com/en/making-an-impact/homebuyer-insights-report
CFPB. (2022). Mortgage Servicing Rules. https://www.consumerfinance.gov/compliance/compliance-resources/mortgage-resources/mortserv/
Freddie Mac. (2022). Primary Mortgage Market Survey. https://www.freddiemac.com/pmms/about-pmms
Gallup. (2022). Economic Conditions Report. https://news.gallup.com/poll/1609/consumer-views-economy.aspx
Joint Center for Housing Studies of Harvard University (JCHS). (2022). The State of the Nation’s Housing 2022. https://www.jchs.harvard.edu/state-nations-housing-2022
Mortgage Bankers Association. (2022). Strategies for Minimizing Foreclosures Post-Pandemic. MBA Newslink. https://newslink.mba.org/servicing-tag/mortgage-servicing/
Odeta, K. (2022). Strategies for Minimizing Foreclosures Post-Pandemic. https://newslink.mba.org/mba-newslinks/2022/march/mba-newslink-wednesday-mar-16-2022/strategies-for-minimizing-foreclosures-post-pandemic/
Redfin. (2022). Housing Market Predictions 2023. Redfin Real-Time Data Center. Retrieved from https://www.redfin.com/news/housing-market-predictions-2023/
U.S. Bureau of Labor Statistics. (2022). Consumer Price Index Summary. https://www.bls.gov/opub/ted/2023/consumer-price-index-2022-in-review.htm#:~:text=Consumer%20prices%20for%20all%20items,for%20food%20away%20from%20home.
Urban Institute. (2023). Household Vulnerability and Policy Support Options. Housing Finance Policy Center. https://www.urban.org/policy-centers/housing-finance-policy-center
Zillow. (2022). Where Foreclosures Are Rising Most. Zillow Research. https://www.zillow.com/research/zillow-2022-housing-predictions-30394/
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