Key Highlights

  • Renovated foreclosures could represent more affordable alternative for buyers and renters than new and/or existing retail homes
  • According to Black Knight Mortgage Monitor, distressed supply outside of forbearance adds up to +1M residential properties

As every potential homebuyer knows, housing inventory is woefully inadequate to meet pandemic demand. Currently, inventories for existing homes available for sale stand at 2.5 months and inventories for newly built homes come in at 3.2 months. Altos Research tells us that overall for-sale home inventories are down -40% from 2019.

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Lawrence Yun, chief economist with the National Association of REALTORS® (NAR), said, “Housing demand is robust (through the roof actually) but supply is not, and this imbalance will inevitably harm affordability and hinder ownership opportunities.”

Yun knows but does not mention that distressed foreclosure properties that are renovated and returned to the retail market that can, in fact, be financed by owner-occupied buyers or rented by tenants are more affordable for both homebuyers and renters than new or existing homes for sale.

Certainly the CARES Act forbearance program and foreclosure eviction moratoria have been essential for mortgage holders hard hit by the COVID pandemic. However, there is additional housing supply exclusive of forbearance programs that could be available to the housing market if those moratoria were lifted.

The Black Knight Mortgage Monitor recently reported that more than 1M residential properties could be added to the nation’s housing supply if certain moratoria were lifted. A breakdown of those +1M properties looks like:

  • 660,000 residential mortgages that became delinquent BEFORE the pandemic and not in forbearance – some 55% of all pre-COVID delinquencies – and about 180,000 actively involved in the foreclosure process
  • 400,000 residential mortgages that became delinquent AFTER the pandemic that remain delinquent and not involved with forbearance.

Looking at post-foreclosure sales in 2018 and 2019, tells us that 54% of foreclosed properties were sold within one year and 68% were resold within two years. The remaining 32% were renovated and returned to the retail market as rentals. The most recent survey done in Q2 2020 tells us that 59% of its buyers are renovating and reselling former distressed properties to owner-occupants while 33% are renovating and holding those properties as rentals.

In both cases, either reselling formerly distressed properties to owner-occupants or to buyers holding them as rentals, the new owner and new tenant are paying less. According to the US Census, the average resale price of renovated foreclosures was -22% lower than the average home sales price for the surrounding county in 2019. And for tenants, the average rent is -25% less than the average fair market rent standard set by the HUD in 2020, according to Collateral Analytics, a Black Knight company.

With FHFA foreclosure and eviction moratoria now set to expire January 31, experts who were predicting a frenzy of foreclosures and evictions starting at the beginning of 2021 may be a bit more optimistic. We don’t yet know whether or not the incoming Biden administration will extend those moratoria even further or if the administration will partially lift the moratoria that apply to the +1M mortgages outlined above by Knight Frank. If it does, there are potential homebuyers, particularly first-time homebuyers, and potential former homeowners who would be willing tenants of more affordable renovated and resold distressed properties to either own or rent.

Agents…keep your eyes and attention fixed on this potential affordable supply option.

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Also read: COVID Bailouts Improving BUT Nearly 3M Borrowers NOT Recovering, Mortgage Delinquencies Expected To Be Above “Normal” Until 2022, Rents Rising in SOME Places

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