With just under 1.6 million mortgages in forbearance as of mid-September 2021 and the federal foreclosure moratorium lifted at the end of July, is there some way we can gauge which markets might be most vulnerable to foreclosure?
We have always emphasized the importance of granularity in analyzing real estate markets. A metro area may have an overall average appreciation rate, for example, but underlying that are many micro-markets or neighborhoods that have done very well while others have moved sideways or even declined.
While home price indices such as the Black Knight HPIs provide valuable insight into broad trends, by going as granular as possible into geographical data we’re able to get a clearer picture of these individual sub-markets.
Zip Code Maps Reveal the Problem Spots
To get a better understanding of where there may be problem areas, we used Black Knight public records data and analyzed all zip codes to first determine what share of homes currently have mortgages. Lower mortgage percentage ZIPs typically have less turnover and more longer-term residents and, thus, tend to have more stability and are less vulnerable to foreclosure contagion. Foreclosure contagion is the negative feedback effect from several nearby foreclosures that, in turn, put downward pressure on the value of all nearby homes. This tends to occur when 10% or more of the homes in a given area are in default or foreclosure and was a phenomenon that we witnessed in many markets from 2008-2010.
Because of the significant home price appreciation in many real estate markets across the U.S. in the past year, it’s likely – but not certain – that we’ll see far fewer neighborhoods impacted by waves of foreclosures, but there will be some that may be more vulnerable than others.
Our data shows that approximately 60% of all homes in the U.S. currently have a mortgage. In Figure 1, below, we map these percentages for single family homes by zip codes. The green and blue shaded ZIPs tend to have lower use of debt which can help to stabilize these markets. Those in orange and red, at 80% or above with mortgages, tend to be more vulnerable.
We used our most recent AVM values coupled with public record purchase or refi mortgage amounts to estimate current LTV ratios (CLTVs) for every home in the U.S. Black Knight clients can benefit from even more granular and accurate analysis by doing the same with actual, loan level mortgage data, using precise remaining unpaid principal balances. But for the purposes of this blog post, public records provide a suitable proxy.
In Figure 2, we show the average of these rough loan-to-value ratios by zip code for those homes with mortgages. As seen, most are shaded in green or blue which corresponds to CLTVs between 50% and 69%. Higher CLTV zip codes are shaded in orange and red and, as seen, there are very few of them.
This can be seen more easily when we show fewer zip codes as we do in Figures 3 and 4. In Figure 3 we show the markets where the average LTV exceeds 90%. This is a result of either more borrowing, more recent financing including second mortgages, or value declines. In most of these markets’ prices have not increased in parallel with the rest of the country.
In Figure 4, we show only those high LTV markets where mortgages are more prevalent, and now the most potentially vulnerable areas become more obvious. Any market with a colored zip code indicator is more likely to suffer negative impacts from the expiration of mortgage forbearance. The good news is that there are very few of these potentially vulnerable markets compared to large numbers in the Great Recession of the last cycle.
Despite the large number of mortgages in forbearance, significant equity cushions exist in most markets throughout the US. The average current loan-to-value ratios are far less than those preceding the Great Recession. However, there are some markets which have been hit hard by COVID that have not benefitted from the appreciation rates observed elsewhere, and in these neighborhoods, there may well be a greater risk of foreclosures. Limited as they are, such markets are likely to have little impact on average metro price trends going forward – in marked contrast to the 2008-2010 period – as they remain a fairly small part of the overall market.