Editor's Note: A previous version of this article incorrectly referenced the 700% increase in foreclosure starts as a year-over-year (YOY) increase. It is, in fact, a 702% increase month-over-month, from December 2021 to January 2022. The same report lists the January 2022 YOY increase as 457.63%.
January 2022 saw a massive jump in the number of foreclosure starts, with ATTOM Data solutions reporting 23,204 foreclosure filings, a 700% increase from December 2021 to January 2022, according to Black Knight. Rising foreclosure rates aren't great news for the housing market because they could be an indicator of distress. As foreclosures steadily rise, could this be the first red flag for a housing market correction?
There's more to the numbers than seen at first glance
A 7x jump sounds massive, but even a small uptick in foreclosures would have been a notable increase when compared to recent levels. Moratorium protections that prohibited lenders from initiating foreclosures during the pandemic in 2020 and 2021 resulted in the lowest number of foreclosure filings since this data has been tracked on a national level.
Today's foreclosure starts, while much higher than recent past, are still below pre-pandemic levels -- by a lot. In 2021, there were a total of 151,153 foreclosure filings for the entire year, which was 69% less than pre-pandemic levels in 2019. For the month of January, there were 56,251 foreclosures filed in 2019, 58% more than the number filed in January 2022.
Foreclosure filings are continuing to rise month over month, with February 2022 seeing 25,833 new foreclosures, an 11% increase from January 2022, which is welcome news for distressed real estate investors. But the numbers aren't necessarily a red flag for the housing market.
Real signs for future red flags
Mortgage delinquencies are the most telling sign for the rise or fall of future foreclosure filings. Right now, there is no reason to believe foreclosure starts will jump dramatically, given the national delinquency rate is sitting at a low 3.3% as of January 2022. Employment remains strong and the housing market is on fire, putting home equity levels at all-time highs. This means that the roughly 2 million delinquent households today have solid alternatives to avoid foreclosure.
But just because today's numbers remain low doesn't mean things can't change. Inflation is a growing concern for Americans, as the cost of basic necessities like fuel, groceries, electricity, and property taxes quickly becomes more expensive. Budgets surely will tighten as a result, and it's very possible we could see delinquencies increase in coming years.
There is also a notable backlog of loans that were previously in forbearance that haven't been addressed. These are loans that are in some type of active loss mitigation or completed loss mitigation efforts but still remain past due, and the ultimate outcome of the loans, either foreclosure, repayment of debt, or a long-term loss mitigation solution like a modification, isn't known.
Signs of distress are definitely there, but they're nowhere near alarming levels and at this time certainly aren't a red flag for a correction. The real estate market is still seeing fierce competition and high demand thanks to a housing shortage and low interest rates. The Federal Reserve has stated it will be raising rates to combat inflation, which could curtail the rapid growth the market is seeing. But for now, all signs point to the housing market staying red-hot.