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What Will Foreclosure Investing Look Like in 2021?

Nov 30, 2020 by Liz Brumer
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The year 2020 was brutal for many. Economic shutdowns relating to the coronavirus resulted in millions of unemployed Americans. Thankfully, the CARES Act extended some relief to property owners, but despite these efforts and the gradual reopening of the economy, there are still 11.1 million people out of work as of November 2020.

High unemployment is often linked to high mortgage delinquencies and eventually, foreclosures. Black Knight's (NYSE: BKI) October Mortgage Report found 3.4 million delinquent mortgages 90 days or more delinquent. However, despite high unemployment and a surge in mortgage delinquencies, foreclosure activity has improved in 2020, with a nearly 90% year-over-year reduction in foreclosure starts. The reduced number of foreclosures despite high mortgage delinquencies is largely due to protections granted by foreclosure moratoriums enacted by state and federal agencies.

Where will activity go in 2021?

But as these protections are set to expire at the end of 2020, many real estate investors are wondering what foreclosure investing will look like in the coming year. While many signs point to an increase in foreclosure properties hitting the market, in reality no one knows for sure.

I personally feel there are two likely scenarios for what foreclosure investing may be like in 2021:

  1. An increase in foreclosures due to the large number of homeowners still out of work.
  2. A decrease in foreclosures due to new policies that could extend foreclosure moratoriums.

Scenario 1: Increase in foreclosures

Right now, all signs point to an increase in foreclosure activity. With many forbearance periods expiring at the end of 2020 and early into 2021 and the high number of people unemployed, it's unlikely many of those currently delinquent will be in a different situation in order to reinstate their debt obligations. Without extended foreclosure moratoriums or forbearance periods, it's extremely likely foreclosure starts will start to increase steadily over the year.

Since foreclosure timelines vary by state and can happen as quickly as a few months up to a few years depending on the state, if scenario 1 does play out as described, investors can expect to see an uptick in foreclosure properties hitting the market around late summer 2021 to early spring 2022.

It's unlikely pricing for foreclosures, particularly at first, will be reflective of large discounts like we saw after the Great Recession. Right now, demand for real estate is high in many markets, with values being driven up. An increase in foreclosure properties would help balance demand and supply and likely slightly lower values a bit. I personally think dramatic discounts even with foreclosure properties are unlikely in 2021.

Scenario 2: Decrease in foreclosures

The other potential outcome for 2021 is a decrease in foreclosures reflective of what we saw in 2020. This would happen if the new Biden administration extends forbearance and/or foreclosure moratoriums or offers new protections that limit a lender's ability to foreclose in the coming year. In this scenario, mortgage delinquencies will remain high, but foreclosure starts will continue to decline, and real estate values will continue to rise as demand outpaces supply.

The Millionacres bottom line

Right now, there are still a great number of unknowns that will affect the outcome for the next year. I personally think scenario 2 is the likely outcome for 2021 because of the change in administration, but we'll have to wait and see how the year unfolds.

Investors should be prepared for a large uptick in commercial real estate (CRE) foreclosures despite continued protections. Current regulation isn't offering the same foreclosure alternatives and protections to investor-owned real estate, and with such a tough 2020 for many commercial sectors, I expect 2021 to be just as prevalent for CRE foreclosure.

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Liz Brumer-Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.