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As Foreclosures Plunge Toward Pre-Recession Rates, What’s in Store for Investors?

G. Brian Davis
3 min read
As Foreclosures Plunge Toward Pre-Recession Rates, What’s in Store for Investors?

It wasn’t so long ago that the words “foreclosure crisis” and “foreclosure wave” were on every other headline.

Those words carried some real sting, too. Millions of homes nationwide cycled into foreclosure in the wake of the Great Recession, and millions of other homes lost value because foreclosures undercut neighboring values so badly.

The times they are a-changin’, though. And for once, they’re changing noticeably for the better.

RealtyTrac’s mid-year foreclosure report offers plenty of reason for hope among real estate owners, although first-time homebuyers and investors may not like every implication.

The Highlights

Foreclosure filings — which include all three stages of foreclosure (default notices, scheduled auctions, and bank repossession/REO) — fell 20% in the first half of 2016, to 533,813.

Showcasing that the downward trend shows no sign of stopping, foreclosure starts (properties with default notices but with no auction yet scheduled) were at an all-time low in the first half of 2016.

And wrapping up the first half of 2016? In June, foreclosure filings dropped to a 10-year low, the lowest level since July 2006.

In 15 states, foreclosure activity so far in 2016 has actually been lower than pre-recession levels. This is a sigh of relief for those who’ve felt economic recovery has limped along too slowly.

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…But There Are Lowlights, Too

Still, nationwide foreclosure filings remain 21% above pre-recession levels. Foreclosure completions still clocked in at a lofty 48% above pre-recession levels, but were down 6% from 2015.

The downward trend is far from equally distributed, however. In 19 states, foreclosure filings rose year-over-year, bucking the trend and worrying local economists. Particularly troubling are the foreclosure spikes in Massachusetts and Connecticut, at 46% and 40% respectively — not the results these states had in mind as they tried to legislate their way out of foreclosure problems.

Despite the common narrative, it’s not only rural areas struggling with foreclosures. Of the 20 largest metro areas in the United States, five of them saw higher foreclosure filings in the first half of 2016. Boston in particular appears in crisis, with a soaring increase of 38% (compared to a 7% rise in the next hardest-hit city, Philadelphia).

Implications for Housing Markets

Nationwide, real estate has performed well in the last five years, with the median sales price rising 35.1% from June 2011 to June 2016. In fact, RealtyTrac puts June as the all-time record high for median single-family home prices in the United States.

The decline in foreclosures over the last five years has certainly contributed to that rise. When foreclosures surge, they undercut “normal” home values by flooding the market with homes selling at bargain basement prices. High foreclosures also mean more inventory for sale, albeit through forced means.

As foreclosure rates have slimmed down, less bargain inventory has been available on the market, depriving bargain hunters of the previous glut of cheap supply.

Speaking of inventory, housing starts and completions both ticked up in June. As welcome as that news is to first-time homebuyers, total housing inventory is still down 5.8% year over year. Supply won’t be outpacing demand any time soon.

And to the extent that strong employment means strong demand for housing, July’s sunny jobs report reinforces the case that cheap real estate is not on the immediate horizon.

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What It Means for Investors

All indications are that we’re in for a seller’s market for the foreseeable future.

This is great for everyone with a 200-property portfolio, but what about investors still looking to find deals?

First, keep a pulse on your state and local market. As outline above, there are many states where foreclosures are rising, not falling. Bad news for the local economy, but it can represent opportunity to investors.

Second, consider expanding your modus operandi. If you’ve never tried using bird dogs, maybe now is a good time to try something new. Or perhaps you’ve always been intrigued by tax liens. Or estate sales, or a closer partnership with a real estate agent, or the brilliant new method you invented. As the market changes and evolves, so must we all.

Lastly, consider other sides of the business that might make more sense in your market. With fewer borrowers defaulting, perhaps now is a good time for note investing. Or if you do have a knack for finding values, there may be more demand than ever for your wholesaling skills. Nothing says you have to stay in your comfortable market niche.

Finding bargains may be harder, but nationwide, real estate certainly looks like a good place to have money right now.

Foreclosure investor? Foreclosure survivor? We’d love to hear some stories, and your take on what declining foreclosure rates means for real estate investors. Alternately, if you’re in a market with rising foreclosures, any thoughts on why your market is bucking the trend?

Be sure to comment below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.