EP NNA 67 – Post-COVID Real Estate Investing Predictions With Daren Blomquist

NNA 67 | Post COVID Real Estate

NNA 67 | Post COVID Real Estate

 

Nobody really knows for certain what post-COVID real estate investing will look like, but we can make pretty good predictions based on the data that we have from the previous recession and what the market looks like now, months since the pandemic’s initial onslaught. As things stand, there are opportunities now and there will be opportunities to come, if you know where and how to look for them. On this episode of Note Night in America, the Vice President of Market Economics for Auction.com, Daren Blomquist, joins Scott Carson and shares the different market factors of the residential real estate investing markets. In particular they look at how the distressed note’s market is doing in the face of increasing defaults and the tempering effect of foreclosure moratorium and the forbearance programs. They also discuss the future timing of foreclosures and how it will affect real estate investors and markets over the next one to two years.

Listen to the podcast here:

Post-COVID Real Estate Investing Predictions With Daren Blomquist

We’ve got a special guest, but before I get into introducing him, we’ll go through a little bit of the homework or updates on a variety of things. You can always catch the replays by going to either WeCloseNotes.tv. They’ll take you directly to our YouTube channel. I highly recommend you subscribe there because we’ve got a lot of different education, not only with the Note Night in America webinars but also the Note Closers Show. You can always listen to the podcast anywhere that you listen to podcasts out there all across the country, including being nationally syndicated across the country on different radio stations. As always, you can always check out all the things that we offer at WeCloseNotes.com.

Once again, thank you. It’s always exciting to see that we hit continuously over two million and that number is growing. We’ll be closer to probably 2.5 million to 3 million. Over 25 million readers and over 600 episodes. It is the 50-megawatt blowtorch of what we offer here for you. You have to check out that at TheNoteClosersShow.com. If you do, leave a review and subscribe. One of the big things I know a lot of people have been enjoying is our Note Nation Top 40 Tour, as we’ve been highlighting the top 40 markets. We had a lot of great stuff, a lot of great feedback.

People enjoyed us breaking down the different markets. I’m excited about our guest too because he’s going to add to it as well in a variety of fashion. I couldn’t think of a better person to have right about that halfway as we’re going through a cross country tour. There are lots of great stuff. If you missed a market, you can always go to our YouTube channel, WeCloseNotes.tv. I edited the page. It should show the playlist for the past markets that we’ve covered. It is a great time. We see a lot of defaults out there. I’m already seeing more commercial deals come across my desk than I did before in a variety of fashion.

If you’re an investor, now is a good time to be learning and honing your craft to find out where the different opportunities are for you. If there are no questions about that, I am excited to have our special guest joining us. He is the Head of Market Economics at a little small company called Auction.com. I’ve known this guy for a couple of years. We originally met in San Diego at the Collective Genius Mastermind, Daren, if it takes you back a little while there. His work has been cited by thousands of media outlets across the country. He’s appeared in all the big networks and everything in between. If they start thinking about real estate trends, this is the guy that reached out to find out what’s going on in the market. He’s formerly from RealtyTrac and ATTOM Data Solutions. He calls Irvine, California home and we’re honored to have him here. Daren Blomquist, what is going on? It’s been too long.

It’s good to talk to you.

Daren, do you want to talk a little about your background and how you got to where you’re at now before we dive into what you’ve put together?

I started my career in real estate back at RealtyTrac in 2001. I started working there and our focus was providing foreclosure data for folks. We started putting out a foreclosure report because we had all this great data we were collecting from across the country. We started putting that out in 2005. Little did we know at that point that foreclosures were going to explode a couple of years later. We became the go-to source for that foreclosure data both on an individual investor level, but also in terms of the media and government agencies because there was no national source for foreclosure data. That got us a lot of attention. It was a wild ride through that foreclosure housing crisis period. We continued on and RealtyTrac and eventually became ATTOM Data Solutions in part because of that experience. We realized there was a market for selling this data in bulk. The website was designed for individual investors and that continues on to this day.

It transitioned to ATTOM Data Solutions because of that opportunity to sell the data in both to companies and government agencies and others. We have now moved over to Auction.com, which is in a similar space, but hyper-focused on a distressed market and on specifically those transactions that take place. There are two transactions that we focused on. The foreclosure sales, which are the in-person foreclosure auctions on the courthouse steps traditionally, and also the online auctions of bank-owned properties, REO properties.

It’s been exciting right here too. I couldn’t have told you when I started that we were going to see this craziness come to fruition, but we’re heading down the road, not to steal too much about what I’m talking about. We’re heading down a path of another crisis for sure. Nobody would argue with that. Just at the point where it seemed like things were calmed down and it was this predictable distressed market that wasn’t huge, but it continued to go on. All of a sudden, on the horizon, we see the prospect of another increase in distressed activity because of all the economic turmoil that’s going on here.

It’s definitely been a bit of a knee jerk reaction and it’s unique. One of the statistics that I’ve seen is that when the music in the merry go round stopped back in 2008, I was a mortgage banker back then, and it stopped like that. It came to a halt as far as originations and then a lot of defaults and foreclosures, but it took us a while to start hitting some numbers. The number I’ve seen is that first to get to the 1.6 million defaults. It took eighteen months from that point. We’ve basically hit that number and beyond in 4 or 5 months now. Do you think it’s going to be worse? Do you think it’s going to be this kick the can down the road as long as we can? If you had a crystal ball, what would you say, Daren?

We’ve done our best to create a crystal ball, but of course, nobody has that, but we’ve created some models. We have a lot of great data internally from Auction.com, as well as I looked at a lot of public record data. I’ve been looking a lot at what happened last time versus this time and in previous recessions. The pattern that we’re seeing is we’re hitting a peak a lot faster. This is a lot more like a pulling the Band-Aid off the situation in terms of things getting bad quickly. The pattern that seems to be playing out. The big wild part is that things will bounce back faster as well. It’s highly dependent on the virus itself and how that behaves and how medicine, technology and science is able to address that.

There’s already a lot more concern about a double-dip situation because of the virus coming back and a resurgence in cases. That’s a big wild card, but if I were to say high level, we’re not going to see the sheer volume of defaults and foreclosures that we saw in the Great Recession. It’s not going to be extended as long, but we are going to see some bad months and some bad quarters in terms of that. The one thing I would say in addition to that though is the government policymakers are trying to avoid the mistakes of the Great Recession, which is it did take a while to ramp up, but they were behind the curve. In fact, our company RealtyTrac at the time in 2007 was putting out reports saying there are these huge percentage increases that we were seeing in foreclosures.

NNA 67 | Post COVID Real Estate

Post COVID Real Estate: We definitely see the prospect of another increase in distressed activity because of the economic turmoil that is going on.

 

We were getting pushback from industry so-called experts and others that are like, “You guys don’t know what you’re talking about. You’re new to this. You’re sensationalizing the numbers to get a headline.” They were giving us too much credit. We were looking at the numbers and recording and we weren’t doing it perfectly, but it turns out we were right anyway. There was a mistake last time where the industry didn’t take the crisis seriously enough and the government didn’t either. We’re seeing the pendulum swing the other way now where everything is being thrown at trying to avoid a huge wave of foreclosures hitting the market. The defaults are going up quickly, but because of the foreclosure moratorium and the forbearance programs, foreclosures are going down and they’re drying up in a sense from the perspective of an investor and we think that’s good.

That prevents this huge shock to the system, but there has to be a lot of caution with that. It has to be applied carefully because there can’t be some unintended consequences with prolonging the pain. As I said, the pattern seems to be a sharp uptick and then we’ll come down faster as well. If you kick the can down the road, which is what we’re doing and it’s election year as well, so that’s adding into it. There is a good element of that that helps protect the market from being shocked like it was back in 2008. The problem is you have to deal with that distress at some point and you can’t get the can down the road forever. If you do that for too long, you build up a lot of uncertainty in the market, which has a lot of repercussions. You also risk having that big shock that you were trying to avoid hit down further down the road.

Now you’ve done a good job. You gave me a sneak peek of your presentation. Do you want to bring that up and we can go through with it a little bit? Everybody’s going to understand a little bit more of that double-dip you mentioned there, and some of the other things that we’ve seen and gone from there.

This is from the perspective of investors, which is your audience primarily. There are opportunities, but because of this delay that we’re seeing, there’s also definitely going to be opportunities down the road with investing. It’s this interesting juxtaposition from an investor’s perspective where when the opportunity is going to hit, and there’s definitely opportunity now, but there are some big caveats on that. There will be opportunities down the road. This ties into what we were talking about. To illustrate, the nature of this crisis is much different than previous crises. This is through the perspective of unemployment.

The fact that you see this basically in one month skyrocketing. There are eighteen million layoffs. We didn’t reach that during the Great Recession over a period of many years. The nature of this crisis is much different to the point that we’re making now. The big question is how is that going to come back down? We saw a sharp drop off or improvement, I should say, in the employment situation. That seems like good news. The one thing that we’re looking at is this now and not yet theme that I’m talking about is the blue line is it’s distracting from the core problem, which is who is going to lose their jobs for the long-term.

How is this crisis going to have more of a long-term impact on folks and those folks going to be? That’s that yellow line. The graph from The Wall Street Journal is data from the Bureau of Labor Statistics, but it’s key that we’re seeing this vast improvement in temporary layoffs, which is good. That’s at risk now too with the closing down the economy again. We’re keeping our eye on more over the long-term is that yellow line, which is the permanent job loss, the folks who are not going to be called back anytime soon to work. Those are the folks who are going to struggle. That number is not super high yet, but it is continuing to increase. Another way of looking at it is this core unemployment, which excludes temporary layoffs and also includes some other categories.

That is continuing to rise. This is the perspective of the unemployment rate, even as the overall unemployment rate saw some amazing improvement in June 2020. Even if you adjust for the misclassification, which the Bureau of Labor Statistics is acknowledging them, the unemployment rate probably is higher than they’re reporting. That improved, but this core unemployment, this more long-term scarring of the economy that’s caused by the Coronavirus crisis is continuing to rise. That’s the theme of the overall economy. We think that also is what’s going to affect the distressed market is that core unemployment rate going up. To the extent that it continues to go up, that’s going to result in those defaults that can’t be kicked down the road and solved. There’s going to be a reckoning on those at some point.

That’s an average. It’s got a macro level looking at the different states, too. You got to take that into consideration and what’s going on there, like what Massachusetts is going through with being the highest unemployment rate in the nation. They’ve also put a six-month moratorium on all foreclosures. It’s something we all got to look at too, depending on what comes back, what businesses survive and then figuring out where it all shakes out too.

That’s a great point and that each state is dealing with this a little bit differently, both from the perspective of the virus itself, as well as in the distressed market. There’s a foreclosure moratorium nationwide through the end of August 2020, but some states like Massachusetts and others have already extended beyond that. Those are states where things can behave a little bit differently. We look back to what happened with the state of New Jersey in the last recession. Some of the consequences of kicking the can down the road too long in New Jersey might apply to some of those states that do the same thing this time around.

We’ll get to that. It’s a compelling visual in my estimation to see some of the unintended consequences of that government intervention. The delicate dance of delay and distressed there, again, that’s that theme too. To focus in on a few things in the graph, the blue bars are the 30-day defaults or delinquencies. Similar to the unemployment, those spiked in April 2020 dramatically up above anything we had seen to your point earlier during the Great Recession. At least any single month worth of delinquencies, those jumped, and this does data from Black Knight. We thought that’s like MN. The gray bar there is the 60-day delinquency.

Not surprisingly, the next month of May, we saw those spike up above any single month we had seen during the Great Recession. This is hitting delinquencies. People are going delinquent. There’s no doubt about it. What’s crazy is because of the foreclosure moratoriums, you’re seeing foreclosure inventory, which is the black bar decreasing in both April and May 2020. The red bar, those are the 90 days delinquency. Those did jump a little bit in May. We would expect the June numbers on those 90 days, despite similarly to what we saw with the 30 and 60. These people are progressing through. It wouldn’t be surprising to see that number jump up close to or maybe even above the Great Recession levels. The risk here is there is distress. Just because there are not foreclosures, it doesn’t mean there’s no distress in the market, if anybody didn’t realize that.

We’re delaying that distress from hitting the market, which again is probably a good thing, but there has to be a lot of caution applied to that in my opinion. One of the things you already see is the average days for delinquent for foreclosure are spiking up back to the Great Recession levels. That’s not surprising. All of a sudden, you have these on average older foreclosures. What that foreshadows for me is if you let this go on for too long, you build up as a bigger pool of aged foreclosures and those are the worst thing for the market. If you have a foreclosure that’s been in the process for six months, it’s typically not going to be in as bad a shape as a property that’s been in foreclosure for six years and has deferred maintenance and possibly the people who have left the home.

NNA 67 | Post COVID Real Estate

Post COVID Real Estate: Defaults are going up very quickly, but because of the foreclosure moratorium and the forbearance programs, foreclosures are actually going down.

 

When that six-year foreclosure hits the market, it’s going to have a lot more negative impact on surrounding values and home prices. Even before it hits the market, it’s going to have a more negative impact on surrounding values and home prices. This is data from Oxford Economics. Some of this stuff early on here is looking at the higher-level economic situation. I will drill it out to some implications for investors. A similar theme in the economy is you do see in Oxford Economics. This was their headline, short-term gain for long-term pain. You have this idea, let’s open the economy faster to get that curve going back down. Not the virus curve, but the economic curve and unemployment curve going back down quickly.

Yes, that had that impact, but the risks now by doing that is you may have some more long-term risk of a double-dip recession is what they’re seeing because of that. It’s a similar thing from a little bit different angle as the distress. I did want to focus a little bit on forbearance. Understanding the forbearance program that’s going on is important to figure out what’s coming down the road that is not yet part of opportunities for note investors and other real estate investors. This forbearance is what’s in that bucket of what’s delaying distress. That number has been coming down. It was getting close to five million and this is according to Black Knight. The Mortgage Bankers Association has similar numbers, but it was getting close to five million at the end of May 2020, but in June and early July 2020, it’s been trending downward.

People have been getting out of forbearance and we’ll talk on that for a second, but this is a lot. There were about over 1.3 million folks that were in some default and had missed at least one payment prior to the crisis. All of a sudden, we’re adding four million people to that pool. That’s a big jump. We got to figure out what’s going to happen with these folks in forbearance. We’re seeing more of them now. Not everybody in forbearance is billing, but it’s trending that way. The second quote there, which is from the Black Knight report, is of the forbearance is 37% have now missed at least three payments. They’re 90 days delinquent, 60% have missed two. We expect to know that the prepayment number to keep rising as well.

This dives into a little bit more. This is a little bit dated, but at the time it was 4.7 lien loans in forbearance. Of the delinquencies that happened after the pandemic was declared, 85% to 95% of people who stopped making payments after that has gone into this forbearance. That is the vast majority. You have another pool there on the left of folks who were already delinquent before the pandemic and it’s a different shift. They’re probably not surprising, but only 40% of those folks have gotten forbearance. They were in trouble before the pandemic. This is instructive for our business and for investors because it starts to tell the story of how much of the crisis is impacting homeowners for the longer-term. What percentage of this forbearance is likely to come out the other end and not be able to start back up on their payments again?

Oxford Economics said 60% of the pre-COVID delinquencies are not in forbearance or the majority of them. Only 10% of the post-COVID delinquencies are not in forbearance. When the forbearance program is over or when the moratorium is over, those are most likely to hit foreclosure right away. Forbearance is another matter. I mentioned that it’s gotten down from 4.8 million to now 4.1 million, and why are people leaving? The biggest share of this pie, 42%, the borrower stayed current and then got out of forbearance, so that’s good.

However, what we’re seeing increasing is the payment deferrals there, the yellow, and the dark blue, the defaults cancellation with no loss mitigation are increasing and then also modification almost double. People who are getting out of forbearance, the forbearance can go for up to twelve months, but certain people who are not going in that full twelve months, they’re already out of forbearance. They’re going either into default with no loss mitigation or some payment deferral, which means they can’t catch up right away or the modification and those numbers increasing. That’s the piece of the pie that’s going to represent more or less long-term distress in this market. We saw that with the last recession. It took policymakers in the industry a while to get on board with doing loss mitigation wealth.

The industry, in general, is a lot better at it now, which is a good thing, but even so with that loan modification, we’re giving a person a little bit more time. Historically what we saw is after two years, about 24% of those loan modifications fell back into default. After five years, 45% fell back into default. Those are not iron clad foreclosure prevention situations there. There are fewer and fewer people staying current on their mortgage payments when they’re in forbearance. From almost 50% in April 2020 to now 25%. Let’s jump into some implications for investors here. Scott, if you’re seeing questions, I can’t see the questions coming in or if you have questions that we can address, I’d be happy to do that.

We’ve got a question. He’s talking about some of the unemployment numbers. The numbers don’t count self-employed business owners who have totally lost their income and a lot of cases as too, correct?

I’m not sure about that specific category, the Bureau of Labor Statistics is not ready. This is an unprecedented crisis for them. There were categories of unemployment that they weren’t even thinking about and that misclassification. I looked at the misclassification of unemployment, which the Bureau of Labor Statistics acknowledges, it’s not a conspiracy theory. The unemployment rate peaked at closer to 20% rather than more like the 16% that we saw in the official headline numbers. They’re struggling to catch up with this unprecedented crisis too. In general, I would say the headline numbers are under 10%.

They’re probably skewed a little bit too for those individuals who are making more on unemployment than they were working. They have no incentive to go back to work or go out and find jobs. There’s a small percentage of that too. You can throw one in the monkey wrench in the machine too.

That is a great segue to this next section, which is this somewhat surprising housing market resurgence. Post-COVID, the housing market is on fire because there are several reasons for that, but one of those is that you don’t see as much carnage in general in housing because there’s a lot of government support coming in including those extra unemployment checks that are helping people pay the rent. That’s helping to make things look a lot better. People aren’t as concerned with buying a house or the risk of buying a house. I’ll get to this in a second. Investors are still confident in the market in general, at least the ones that are using Auction.com. This is a look at retail and the numbers were even higher the next week on this.

They went up over 50%, which is crazy. This is people who are applying for a mortgage to buy a home. That number has been rising compared to 2019. There are some ups and downs week to week, but in general, you see 7 or 8 straight weeks of increases. People are interested in buying a house right now, which might seem surprising. Some of that is government support and there are other psychological factors that maybe I’m not totally qualified to get into that are at play here where people are interested in homes rather than apartments. Less dense housing rather than more dense housing. Everybody was complaining about the Millennials not wanting to be homeowners. This might be pushing once you waited 1 or 2 years and say, “Let’s buy that home now.”

NNA 67 | Post COVID Real Estate

Post COVID Real Estate: Just because there are no foreclosures, doesn’t mean there is no distress in the market.

 

Also, the ones moving to more rural areas versus being congregated in New York City, moving out into the big towns where it can be a little bit more space too. I agree with that.

I have some good data on that. I’ll dive into it more if I don’t have it on this presentation, but where we broke down both the Auction.com data and public record data sales by the census classifications. You definitely see what’s winning right now are the suburbs. Even what the Census Bureau calls the fringe rural areas, which means they’re on the fringes. There were there on the fringes. They are still close enough to drive into work if you need to, but you can be in a more rural setting. Those are the areas that are winning right now. Areas that are losing are the large cities and the large suburbs even in the analysis. This is another way of looking at the retail market. We are looking at MLS data by week and 2019 now the blue bars and this is not average home sale prices. The black line is 2020. You do see one week there, April 26, where home prices in 2020 were lower, but in general, they have stayed above the 2019 levels. Home prices are continuing to go up for the most part

We are getting into some of the nitty-gritty of the distressed market. This is our own data at Auction.com. This starkly shows the foreclosure market is dried up and the gray lines, are the weekly properties brought to foreclosure. This is on the Auction.com platform alone. We are by far the biggest player out there. We account for over 50% or about 50% of all foreclosure sales nationwide. We’re 50% of the market. It’s not the entire market, just to be clear on that. You see the red line is 2020. It’s pretty much following the 2019 heartbeat in terms of foreclosures.

In week thirteen, which was right about the middle of March, the week after the pandemic was declared, you see that fall off a cliff and the moratoriums went into effect shortly after that. You saw those fall for the cliff and then flatlined. We do see a little bit of an uptick. This is a good thing. They do have an exemption for vacant or abandoned properties. Mortgage servicers early on said, “We are not going to risk violating this foreclosure moratorium. We’re going to basically not foreclose on anything.” We saw it flatline going from 1,500 a week on our platform that was brought to foreclosure auction to literally single digits for several weeks.

We have seen 239 in the week of July 5th, so it’s creeping back up and then the services are getting more comfortable with identifying those that are truly vacant or abandoned and going ahead and foreclosing them. That’s a healthy thing because at the end of the day, those vacant and abandoned foreclosures or abandoned foreclosures, that don’t represent someone who’s living in the home, losing their place to live. It represents a property that the longer it sits there, it’s going to drag down neighborhood values and hurt the neighborhood that it’s in more. The services are realizing that and starting to move that through. There are some more opportunities available and we’re seeing a lot of interest in those few opportunities on our platform. This is broken out by the state.

I’m happy to share for you to share this digitally with your audience. They can go to the interactive map and see some more details about their state. What this is showing is the percentage in the last eight weeks, the eight weeks that ended in July 2020, we learned the number of foreclosure auctions as a percentage of the same eight-week period in 2019, if that makes sense. In Florida, it’s 0%. It’s infinitesimal. Hardly anything is happening there. In Texas, you see we’re at a 10% level. We’re 10% of what we were at in 2019. It’s still a fraction of what we were but the numbers are starting to creep up. Interestingly, Arizona is one of the higher states with 22%. Almost a quarter of the volume of what we were seeing during the same eight weeks in 2019. To your point earlier, things are happening on different timelines in different states, and that certainly affects the opportunities available to investors.

One of the things too that we’ve seen, Arizona had one of the lower default rates anyway. They didn’t have as long an extension statewide as other states have had. I can see why that number is bumping up to 22% is that they’re getting friendlier to foreclose. One of the things that have been interesting too is the fact that most of the foreclosure delays have been basically for the owner-occupants. You’re not talking to investment properties in different states too. It’s got to be a primary residence for us to delay a big chunk to stop the foreclosure aspect. I saw that in a couple of states and a couple of major metroplexes as I was driving into it. That big pushback, “We’re not going to foreclose on anything.” We got to do something. It’s starting to loosen up a little bit.

Investors tend to be overlooked if you want to call them a victim in these situations, but you’re right. There are some of the political leanings of these states with this map too. It is interesting that California is back to 10%, but their volume in 2019 was low. There was 10% of that. New York tends to be much more longer foreclosure processes inherently. On top of that, the courts there have pushed back. There’s still some backlog from the last crisis in places like New York and New Jersey, but it’s still working through, but they’re sitting at 0%. They’re basically not foreclosing anything. On top of that, they already have another backlog and that’s what’s going on there.

Getting back to my theme of now and not yet, but for me, opportunities for investors now are that something we do see as separate, there’s not a lot happening on a foreclosure front, but it is starting to come up in some states. There is some opportunity now on that foreclosure front, but now, the other types of options that we have, which are the bank auctions, REO auctions, which are online and you can do. They’re very Coronavirus friendly, for lack of a better way of saying it because they’re not in-person auctions. They’re remote. You bid online. They don’t require in-person interaction. What we’re seeing there is those are continuing on and we’re seeing evidence that the banks are trying to move those properties because it’s a good time to sell them.

There is this sense that if we see a wave of distressed coming down the road, you don’t want to also have this huge pile of bank-owned properties on your books and adding to that. The volume is down from 2019, but that is in large part because foreclosures are down. The foreclosures are what fills up that pipeline of bank-owned properties. Even with the debt volume down, we’re seeing some good volume of this property selling and some strong demand from investors, which is what this graph shows. It’s a V-shape. Investors got scared in March 2020 so you see the percent of these properties with multiple competing bidders went down a bit, but we’re back up to 85% with multiple competing bidders. There is still some strong demand.

I talked to one of our bigger investors who buy 1,500 to 2,000 properties a year. He’s familiar with going back and bidding on properties and seeing how the services respond. His take on it was that they’re motivated to sell based on how they’re responding online. That’s a now opportunity. Those properties are selling. I did an analysis that I thought would be interesting to your audience. Specifically, these online REOs based on the prices they’re selling at are where you can get the best returns. This is an interactive heatmap that folks would be able to click on and see this for there. This is by county. It’s not every county in the United States, but where there are sufficient data. You see some of the best markets with prices that sometimes are in the tens of thousands on average.

For the online bank-owned properties, auctions in places like counties in Topeka, Kansas, Danville, Illinois, Terre Haute, Indiana, and Columbia, Pennsylvania, and Pittsburgh were the biggest cities at the top of the list. Even then, if you look on in some of the bigger markets, which might get into your top 40 conversations there, are places like Baltimore, Pittsburgh, Memphis, Detroit and Cleveland. Those are the top markets we’re talking about. It’s easily double-digit gross annual rental yields in these markets. We can guess at the cap rates. The cap rates are still good. We don’t know the expenses that investors are incurring, but based on the purchase price, which we know, and the average fair market rents from HUD in those areas. That’s what we’re basing these returns on. A lot of green in the Midwest and the Rust Belt and in the Southeast, but you get to some of the coasts and that’s where you don’t have as much opportunity on the hold for rent side.

Post COVID Real Estate: Surprising as it seems, people are very interested in buying a house right now.

 

To put some specific numbers on those properties. This is a now opportunity. There are distressed property selling, not as much at the foreclosure auction, but there are some selling and the average price is $125,000, which is $81 a square foot. Property selling in the REO auctions online are also $81 a square foot, and in 2020, it’s $133,000 on average. It’s certainly a big cushion compared to non-distressed sales. For investors out there looking for those discounts, they are there. It’s not a huge wave of them, but they are there for, for purchasing opportunities. We did a survey of our investors and right after the pandemic in April 2020, and even then with the shock still setting in, the type of investors that are most likely to be confident in this market were the folks who were holding for rent.

Sixty-seven percent of them said they keep acquisitions the same or even increase acquisitions, or they stay plan to. The smaller investors purchasing ten or fewer properties a year tended to be more confident. People buying REO properties were more confident of the bank-owned properties and that might have had to do with the fact that there was still inventory of those compared to the foreclosure auctions. Where we saw a little bit less confidence from investors was on the fix and flip side. The majority of them said they plan to decrease acquisitions. Also, for some of the bigger investors, and this may again be a bit of an inventory issue, 58% of them said they were planning to decrease. Another issue for the big investors is they’re more exposed. You’re flipping 30 houses out there on the market and something happens where the market takes a dive and you’re in a lot more risks than someone who’s doing one flip at a time.

Especially compared to markets can be out there. A lot of people have been doing stuff to try. As the margins are getting squeezed, if your values drop 5%, 10%, 15%, you may not be in the black anymore. You may be downright in the red, depending on where the market comes out at, final closing costs and things like that too. It’s what happens here in Austin, Texas a lot of the time. It’s gotten much more competitive and there’s a lot of cities like that across the country. It totally makes sense.

We have already seen as margins get squeezed and especially in places like Austin, but this adds a lot more risk, especially for those large institutional investors out there. Between now and not yet opportunities, they’re waiting for the not yet opportunities. They’re waiting for the foreclosure wave to hit, which is good for the smaller investors out there that you can find these properties now that are selling and not have as much competition from those institutional investor’s potential. Here’s putting some numbers to it. This is looking down the road. This is not a crystal ball but just sit down and it’s a little bit of back of the napkin, but we’ve done some modeling around this too. There’s some of that involved, but give some numbers about what it’s going to look like down the road when this delayed distress finally does come back online, at least in greater volumes.

Prior to the pandemic, we roughly 12,000 foreclosures every month. These are completed foreclosures, either going to an investor or going back to the bank as an REO, it’s not a huge number. To be honest, it may sound like a lot, but relatively compared to historical numbers, it’s not a lot, but it does start to build. If the moratorium ended August 31st, as it is set to, and everybody started right away, which we know isn’t going to happen. You’d already have a backlog of 60,000 foreclosures that would have happened but didn’t happen. If it goes until the end of the year, you’re getting up to over 100,000 backlogs there. That’s one element of this.

Another element is the forbearance, as I talked about earlier. We’re roughly five million people in forbearance at the peak of this. If 20% of those folks aren’t able to start back up when their forbearance ends, but they have to go into some loan modification, that would be one million folks in loan modifications. It adds up to 240,000 additional redefaults within a couple of years and 450,000 additional redefaults within five years. That’s some volume being added down the road. If you add all this stuff up, you get it to about 636,000 foreclosures over a two-year period, roughly in 2021, 2022. It’s probably ramping up more of that 636,000 in 2022. That’s that back of the napkin when we plug in our models, using unemployment rates and tappable equity. One thing you put a lot of people argue is you have all these people go delinquent, but you have more home equity than ever these days and that is true.

We use home equity as a counter to the unemployment rate. We’re getting a little bit lower in that range, but between 575,000 to 625,000 in that two-year period. Put that in context, that’s less than half of what we saw in the two-year period in 2007 and 2008. It’s not that much more than what we’re seeing in 2018 and 2019. 2022 is when it starts ramping up because of all these delays. You see it continue. In our models, we would see it even continuing to increase past that. Right now, I’m comfortable with talking about going two years out. A lot of people who say we’re not going to see this huge wave of foreclosures. I hear that. That’s true. At least over the next two years, I don’t anticipate that we would see this massive wave of foreclosures get like in 2007 and 2008. It’s going to get likely to get worse before it gets better on that front.

This was the New Jersey thing I talked about earlier. The further things are pushed out in states like you’re talking about Massachusetts, this is looking back at New Jersey in 2010. They instituted a blanket foreclosure moratorium that lasted a year. It affected most of the foreclosures in that state. You see what the yellow line, New Jersey foreclosures look good in 2011 and 2012. They were back at 2005, 2006 levels. This is great. It is not being impacted.

The moratoriums are working if you’re thinking that way. The moratoriums were instituted for probably a little bit different reason, but that’s another story. What you see there is in the long run, New Jersey foreclosures didn’t peak until 2017. That was seven years after the nationwide peak. We put Ohio on here because Ohio is another judicial foreclosure state that has a longer foreclosure process like New Jersey. We wanted to illustrate that this is not a judicial issue. This is was specific to New Jersey. We think at least a large part of it had to do with that foreclosure moratorium, backed up foreclosures that were going to happen anyway. That delayed that distress and created this long tail of elevated foreclosures in New Jersey.

Whereas Ohio, it peaked a little bit in the nation in 2013, but then there was this gradual descent from there. We think this has implications on home prices in states like New Jersey, that if the states that delay things longer, as of yet earlier in 2020, New Jersey home prices were still 7% below their pre-Great Recession, whereas Ohio and the US as a whole had both seen home prices recover back above pre-Great Recession. We think part of that had to do with that long tail of delayed foreclosures there.

It could be all of the foreclosures, all effective market derogatory and value drop it the longer you drag it out, it’s like let’s keep pouring salt in the wound to the local markets as foreclosures keep getting added to the pumps these days versus what they were trying to be an avoided for a while. That totally makes sense.

To be fair, New Jersey had some other issues hit them later on. New Jersey has Hurricane Sandy that hit in 2012. That was a great time. At least in Atlantic City, they had casino closures and that was around 2014. They did have tough things hit, but Ohio is not having the best economy during that time either. You’re setting yourself up to be more susceptible to things like that shocks to the economy. If you have this shadow inventory, as people called it, a foreclosure sitting there. When they hit, they have a derogatory effect on prices. Even before they hit, the fact that people know they’re there or have the sense that it’s almost the unknown that they’re there does impact the market as well.

NNA 67 | Post COVID Real Estate

Post COVID Real Estate: There is no huge wave of distressed property selling, but there are going to be purchasing opportunities.

 

I’ve thought this was a cool thing to be showing. The migration that we are seeing based 2019 census data, the net migration. This is another of those interactive maps that your readers can look at. Even before the pandemic, the states that we’re losing population were California, New York, and Illinois. Those are the three big ones. You see the blue is basically losing population. Yellow is gaining population. I would say specifically population due to net migration, people moving there, or moving away from there.

Whereas Florida was the biggest gainer in Texas and Arizona were the top three on the other side of things. That trend was already in place. In some ways, this pandemic is accelerating this trend for different reasons. People are moving from these high costs, densely populated coastal cities and moving to suburbia and rural areas. We see that. When we overlay public record home price data with the census data, you see that mid-sized cities, fringe and rural areas, mid-sized suburbs and even some other distant rural areas that are further out. Those are outperforming the overall US home price appreciation.

This is for the second quarter of 2020. This is after the pandemic. The rural remote is down. Those are at least 25 miles away from any metro area or any urbanized area. Those are rural. Those have not done well, but besides those large cities, barely a slight percentage increase. The large suburbs were below the overall market. Even the small suburbs were below the market, but particularly in large cities, there are a lot of volumes there. That’s where we saw very weak home price appreciation, which supports this idea that we’re going to see a map again for different reasons. We’re going to see a map continue to look like this as people move away. In 2019, it was because of high taxes and weather in some cases, and now it’s because people want to get away from densely populated areas.

Investors are catching onto that trend. The graph shows where the sales rate for these online REO auctions that we’re doing, the percentage of those that are selling in cities is down 7% from 2019. The sales rate on the flip side in the suburbs is up 8% on the R&R. Rural areas are up as well. The foreclosure auctions, which are small sampling size, that’s why you see some more dramatic numbers there, but again, the suburbs far and away are the winner. Investors are saying, “This is where I can buy properties and sell them because that’s where the interest is.” We’re seeing more interest in buying the distressed properties on our platform in the suburbs as opposed to the city.

People like to move, they’re moving here. I live in Williamson County, Texas, which is one of the top cities. The other part in Collin County being up in that neck of the woods up near Dallas. I know you focus primarily on the REO side. This is all on the residential side. It doesn’t have anything on the commercial side right there.

This is all residential.

 I was speaking to somebody that Fannie and Freddie have already come up with a fact that they expect to do another six-month forbearance agreement after six months. That’s a twelve-month. Even then, as it gauged their borrowers, they’re still willing to go forbearance beyond that for another six months. It could be 12 to 18 and forbearance plans on the government-backed securities. Do you think that’s going to incentivize the banks when they look at their portfolio now and the fact that they haven’t had to do anything? They’ve been given a little bit of as we say, kick the can down the road a few months. Do you think that’s going to incentivize them to start moving some of that stuff, the loan products that probably haven’t taken a higher hit rate like the non-prime stuff off their books that they moved this quarter and try to move that headache away from their portfolio. Do you think that’s going to see an increase in that?

I do think so, yes, because they’ll have more control over those because you don’t have the government piece of that. You’ll see them moving into those more and then we’ve even seen the buybacks in some of the banks. I can’t recall any of the exact numbers, but the banks are buying back especially the Ginnie Mae. That’s FHA and VA loans buying them back into their own portfolio because they want to be able to control the forbearance and control the fate of that loan themselves. That’s in the forbearance report that we saw. There was a big drop in the Ginnie Mae forbearance. There is a corresponding uptick in the private loan forbearance bucket. You’ll see some of that going on as the banks want to control their own destiny a little bit more in. They are not the terrible quality loans of the last era.

You don’t have as many liar loans, as they say, fog a mirror and get a mortgage. It wasn’t quite as bad. It wasn’t extreme if you look at some of the numbers. I was talking to some mortgage brokers and bankers of Bank of America. For FHA loans, they were donating the down payment and then putting $10,000 towards closing costs so that people could still get in with 100% down. That’s been the biggest uptick in the default rates when everything hit the vein in March and April 2020 for us out there. It’s an interesting timeframe right there.

To your point about FHA loans, back at the beginning of the year before all of this hit, a lot of our clients and our own selves, we are seeing an uptick in foreclosures as a result of FHA because of the increasing risk of the last few years. Those are also going to be more susceptible with a shock to the system.

One of the things too, I was talking with a gentleman who does a lot of conversations with FICO and FICO being a lender-facing the institution, trying to identify opportunities there. They came out with a new borrower distress stress test on November 1st. They are identifying opportunities. With everything being with the quantitative numbers and being able to throw stuff in there, I think they’re glad they did this in November. Because now they can identify specific borrowers who are much more likely to distress or default not only on the mortgage side, but also on credit cards and other loans. It also works the opposite way. They can see those that have been quality borrowers and are willing to lend more. He’s seen an increase in credit lines being approved, business lines of credit for some of the more stable borrowers out there that haven’t gone to a forbearance agreement or having default in a variety of ways.

On the frontend side, it’s a perfect storm of weirdness happening in the lending markets these days. If you would like a copy of his slides, email me at Scott@WeCloseNotes.com. Daren, if people have some questions and you want them to reach out to you on other things too? You’re like being a guest on podcasts and the media outlets to share some of the information you got going on too, right, Daren?

NNA 67 | Post COVID Real Estate

Post COVID Real Estate: Mid-sized suburbs and even distant rural areas are outperforming the overall U S home price appreciation.

 

Definitely. I’m not doing as much, especially back here in terms of the media, but certainly with folks in the industry, I’m happy to share our market insights there. You can see the research that we’re doing. If you go to Auction.com/inthenews, that’s where we’re posting a lot of our research and some of these heat maps that I’ve referred to. Also on our LinkedIn page, we’re putting a lot of that stuff up there as well.

Daren, thank you for coming on and spending here. I totally appreciate it. As the world turns, we may need to have you back on at a later time. What do you say?

For sure. I want to see if some of these predictions will come true. Thank you for having me on. It’s been awesome.

Thank you, Daren. I appreciate it. That’s going to wrap it up. You’ve got a lot of great information from Daren. He did a great job. He had those heat maps. The numbers tell him where everything’s at and what he’s seeing. If you’re an REO fix and flipper, it will probably take a little while before you see some of these things at the market over the next 12 to 24 months or beyond that, as we talked about, you have to take a look at where your state is at, where your market’s at, what’s going on. Micro-economical besides just macro. As always, thank you for being here. Go out, take some action, take the information that you learned, apply it and use it to your benefit in your real estate investing business. We go a lot better in the long run. The more that you learn and the more you take in and research the different markets you’re in, or even the other markets out there where people are going to. Go out and be safe.

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About Daren Blomquist

Daren Blomquist is vice president of market economics at Auction.com. In this role, Blomquist analyzes and forecasts complex macro and microeconomic data trends within the marketplace and industry to provide value to both buyers and sellers using the Auction.com

Daren’s reports and analysis have been cited by thousands of media outlets — including all the major news networks and leading publications such as The Wall Street Journal, The New York Times and USA TODAY. Daren has been quoted in hundreds of publications and has appeared on many national network broadcasts, including CBS, ABC, CNN, CNBC, FOX Business and Bloomberg.

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