Forced sales turn the housing market

A recent firsttuesday poll asked readers: How many homes currently on the market are delinquent on mortgage or property tax payments?

184 readers responded, with:

  • one-in-six saying 10% or less;
  • one-in-six saying between 10% and 20%;
  • one-in-three saying between 20% and 30%; and
  • one-in-three saying 30% or more.

While two-thirds of readers report less than 20% of property listings as delinquent, a still-sizeable one-third of readers report over 20% of today’s property listings are delinquent on either mortgage or tax payments.

However, the official mortgage delinquency rate for one-to-four unit homes continues to fall back, from the recent peak of 8.0% in 2020 to 3.6% in the second quarter (Q2) of 2022, according to the Mortgage Bankers Association (MBA).

For historical reference, today’s diminished 3.6% rate is the lowest delinquency rate on record since MBA began tracking the rate in 1979.

Delinquencies tend to follow the labor market closely — when job losses are high, so goes the delinquency rate. Then, as jobs are regained, the delinquency rate contracts.

However, MBA’s delinquency report covers the total share of delinquent mortgages, while our readers on the ground are reporting the share of listings with delinquent payments. Following our readers’ lead, a growing share of sellers are therefore listing out of necessity to avoid a foreclosure sale.

More forced sales translate to more desperate sellers, willing to accept price cuts and buyer concessions to rid themselves of a dead-end asset. The market is tipping quickly, from the past decade’s sellers’ market to a buyers’ market.

What’s behind the shift to favor buyers? California’s housing market is now operating under the pressure of an undeclared recession. Unlike the 2020 recession, government interference — stimulus and artificially low interest rates — will be limited as the Federal Reserve continues their battle against rising inflation.

Watch for delinquencies to rise in the months ahead, particularly as home prices continue to fall back under the strain of rising mortgage interest rates and floundering home sales volume.

Worse, the further home prices decline, slashing the home equity buildup of the past two years, the less likely a delinquent homeowner will be able to complete a traditional sale. Then, foreclosures will rise, leading to a swell in real estate owned (REO) property.

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