How a Surge of Foreclosures Will Impact the Housing Market

David:
This is the BiggerPockets Podcast Show 580.

Daren:
Foreclosures are actually providing almost a refurbishing of housing inventory. And again, it’s a small piece it’s not going to solve the affordable housing issue that we have or the housing supply issues completely. But it’s one piece of the puzzle that is taking these properties and putting them back into the market.

David:
What’s going on everyone. It is David Greene, your host of the BiggerPockets Podcast here today with my amazing, awesome and fun co-host Dave Meyer. If you are here because you want to find financial freedom to real estate, you my friend are in the right place. BiggerPockets is a community of over two million members that are all on the same journey as you. They want to improve their lives, get back freedom to live life the way that they would like and build wealth through real estate. We help you by bringing on stories of other people that have done the same thing. People that are experts in the areas of real estate investing that would benefit you, people that made mistakes so that you can avoid them. And guests like today, where we have Daren Blomquist, a VP of marketing and economics for Auction.com, who is a foreclosure expert.
So Daren spends the majority of his day looking at data of how many foreclosures are hitting the market, and then trying to connect buyers of those foreclosures with the inventory that’s being released. So Dave and I get into some pretty deep information about how many properties are going to foreclosure, what happens once they get there? If you want to buy those, what you need to do as well as what we think is going to happen in the future. So this was a fascinating conversation. Make sure you stay all the way to the end because we give a take [inaudible 00:01:45] that you don’t hear very often that has to do with the psychology of human beings that are all sitting in the seats that we’re sitting in and how it tends to move back and forth very strongly, depending on what the masses are doing and how you can capitalize on that to build your wealth. Dave, so glad you’re here today. What were some of your favorite parts of today’s interview?

Dave:
Oh, thank you so much for being here. I’m glad to be back. And I think the favorite part was what you talked about. You just said, it’s so interesting because I’m person, I’m not an economist, but I do read a lot about economics and look at a lot of data. And while data is super helpful in decision making, there is this element of psychology that you really have to take into account and you have to factor in in doing your research, and you and Daren both talk about that really well at the end of the show. But I also just think this topic is something I’ve wanted to dive into for quite a while, because there is a lot of data about it. I’ve looked at it a lot myself and I wanted to get an expert’s opinion on whether foreclosures are going to cause either a crash or maybe they’re going to help the housing market because there’s going to be more inventory. And Daren was great and provides all that information. So everyone’s going to want to stick around for this.

David:
Great point.

Dave:
So the interview with Daren is great, but David, I also have a surprise segment for you coming up before that interview and it’s going to be really fun. We’re going to talk about some news, we’re going to talk about major headlines and I actually have a pretty big announcement so everyone’s going to want to pay attention to this first segment we’re about to do.

David:
All right. Today’s quick tip is follow us on YouTube at BiggerPockets. There’s a lot of content we’re making on YouTube that isn’t only being shown on the podcast. So Dave’s got a channel he puts a lot of information. I have a channel for BiggerPockets, I do more videos. There’s a lot of different people on there, so if you’re needing more real estate information and there isn’t a new podcast to listen to go check us out there. Here’s what’s even better, you can leave us a comment on YouTube and tell us what you think. So we’re doing shows like this today because we’ve committed to going deeper and giving more factual and specific information on literal topics in real estate.
So today would be the foreclosure game. We want to hear what you want to hear more from us about. So tell us what topics you’d like us to cover, we will put a show together for you, we love that. And then also don’t forget to leave us a comment on iTunes. We still check that, that still really matters as far as how popular the podcast becomes. And we want this information to get to as many people as possible. So please leave us a rating and review on iTunes, leave us comments on YouTube, tell us what you like to see more of and we will get to it. Dave, any last words before you hit me with these surprise questions that you’ve got?

Dave:
No, I’m excited to bring on my surprise segment. All right. So today, David, first of all, I love that you’re just letting me take over the show and have no idea what I’m about to propose to you. But what I’d like to start with is a new quiz game, I like to call it news or noise. And basically what I’m going to do is read some recent headlines from the world of real estate investing and get your opinion on whether this headline is in fact news or if it’s noise. And not that you’re not great on your own, but I’ve also brought in some extra firepower for this game. We have Mr. Henry Washington and Mr. Rob Abasolo joining us today. What’s up guys?

Rob:
How’s it going?

Henry:
What’s up buddy?

Dave:
Awesome. Thank you guys so much for joining us here. I feel like we’ve got the all star team and for our first headline Redfin released data this past week showing that a record 32.4% of their users looked to move to a different metro area in January. This is an all time high and represents a 25% increase in people who are looking to move over Q1 of 2020 right before the pandemic. So Henry let’s start with you, is this in fact news or is it noise?

Henry:
Oh man, this is news. The world is changing with the pandemic forcing the world to get comfortable with virtual working, with virtual learning. You don’t just have people with jobs that can relocate to areas that they maybe feel like are more affordable because the housing prices are increasing across the country. And so you’ve got people moving to areas where they feel like they can afford more because they know they can continue to work at their current job. You’ve also got students moving and I just think this freedom of where you work is going to continue. And I don’t see housing prices coming down anytime soon. So this is absolutely news, it’s going to continue to happen. It’s the new norm for right now.

Dave:
All right, David, I saw you nodding along there. What is your thoughts? Is this news or noise, and what are some of the implications of this?

David:
Well, this is absolutely news. It’s just not news to me because as a realtor, I’m watching this happen constantly. I would say that I think it’s probably overall healthy for our country to have a variation in what different states can offer. This is just my personal opinion, I don’t want to be speaking for anybody else, but there’s obviously going to be a difference of opinion in how things should be run politically. And when the federal government tries to make every state work the same, if they’re going against what the individual wants to see, they’re going to be very frustrated. If they become unpatriotic, then it becomes negative and bitter. But if you have a state that will have a set of rules or be governed politically according to what you like, and then other states that you don’t, you have freedom of choice.
You can go to the state that does things the way you like things to be done. Like Dave, you’re an Amsterdam. It’s notoriously known for not having laws when it comes to the entertainment industry, so to speak. So it draws people that are looking for that, and I’m not trying to imply that that’s why you’re there. It’s not a big rich party. I just think Amsterdam’s a really good example of that. If you’re super conservative, you don’t want to be around anything like that, you go to Singapore. If you’re looking for a little bit more of a party, you go to Amsterdam, it’s nice to have choices. So I think what we’re seeing is people are recognizing, like Henry said, I can move. I’m not tethered to my area because of my job.
Maybe my family could keep me tethered and as kids are moving out of the house and people are retiring, they’re saying, “Hey, I want to be in this type of political environment instead of that type, I want less sales taxes on me or state income taxes on me.” And other people are saying, “No, I like high state income taxes because they pay for programs that I like to support and that’s what I enjoy doing.” So I think what we’re seeing right now is this is how people would have been acting all along. But some of the restrictions that stopped it have been removed, like what Henry mentioned. And I think as an investor, it is so important to pay attention to what we’re talking about because I am specifically going to those areas as long distance investing that I believe more people or wealthier people are going to be moving to and I’m trying to buy properties in those areas before they get there.

Dave:
All right. We’ve got two for news. Rob, are you going to agree with everyone? And I’m curious as well, I’m going to throw an extra bonus question for you.

Rob:
Ooh. A curve ball.

Dave:
Yeah. I got to test you early. Is this going to be a long term trend or do you think this is just a blip after the pandemic?

Rob:
Okay. Let’s do this thing. News, it’s definitely news. Dave, I’ve moved three times in the last year. Literally-

Dave:
You’re contributing to half of this statistic, Rob.

Rob:
I am the statistic. I moved from Los Angeles to Tennessee to pursue building a tiny house village out there. I lived there for a year, then we decided, “Hey, we miss home. Let’s go back to LA.” We lived there for a month, and then we were like, “Hey, you know what? Let’s move to Texas.” And we’re currently in Texas at the moment. So I don’t know when we’re going to move again or if we’re going to move again. But to answer your question about if this is temporary or permanent, I think it’s permanent. I think it’s here to stay. You have to really consider the culture shift in the paradigm here. For a long time, all we knew was working in an office 9:00 to 5:00 and this is so common with so many different things out there. So let’s just take taxi cabs, for example.
Our whole life, we thought taxis were our only option and they were. And then Uber came around and people could then hire a taxi on demand, and now Uber is the new taxi. For a long time, we all thought long term rentals were the way to go. And then this whole thing called Airbnb came by and now that’s a whole new shift in the real estate market. But on top of that as a consumer, we thought hotels were our only option because for many, many years they were. Then Airbnb comes along and now people say, “I don’t want to stay in a little creaky, old nasty hotel. I want to go stay in a cool Airbnb where I can split really big house with my family for half the price.”
I think this is the exact same way with office and corporate culture where we thought we had to stay in the office 9:00 to 5:00 our whole life and be on the grind and work 40 years and then retire at 65. But I think what the pandemic has given light to is that things are important in a different way, we give importance to certain aspect to different things. So before money and security was something that we were all so married to, but I think the pandemic has helped a lot of people realize that, “Yeah, you know what? Maybe I don’t want to be working in the [inaudible 00:11:09]. Maybe I want to be closer to my family and if that means I make a little less, then hey, I’ll just move to a different city where I make a little less so I can be closer to that family.” So I think this is just the very beginning of a very huge culture shift in America. Thanks for coming to my Ted talk.

Dave:
I thought I was going to throw you off with that curve ball, but you nailed that one. So I’ll actually just come back to you with the second headline and we’ll do this one a little bit quicker, otherwise we’re going to get in trouble. But number two headline here is Zillow has emerged from its post iBuying shame, hiatus, whatever they call it, and is now claiming to be building a super app where home buyers can manage the entire home purchasing process in one place. Rob, is this news or noise?

Rob:
So can I get some clarification here. When you say noise, does this mean this is not truth you just made this headline up or?

Dave:
No, this isn’t two truths and a lie. No.

Rob:
Okay. Just making sure-

Dave:
Is this something that real estate investors should be paying attention to?

Rob:
Got it. I’m going to go noise on this. I think Zillow’s best interests and effective every capacity to try to come up with this really big thing that’s going to save them from this giant hole that they dug themselves into. Did they make an app? Maybe, but calling it the super app that’s going to help you do everything from start to finish, doesn’t necessarily mean it’s true or that it’s going to be really that super. So I’m going to go noise on this one.

Dave:
All right. David, what do you got?

David:
I think Rob nailed it. I think in general, every time somebody tries to convince you that things are easier than they are, they’re making money and you’re not. So this has been very common for a long time. Zillow will tell the people who are cruising on their website, “Hey, give us your information and we’ll get you in touch with an agent.” And then they go sell that information to five different agents and your phone blows up by these people that you never really wanted to talk to in the first place that paid money like $200 for that lead. And so they’re all going to just call you forever.
And I think Redfin had a model where they’re like, “Hey, we’ll credit you back to commission.” And what ends up happening is that agent basically makes no money and so their argument was well, every agent’s the same. So you might as well get your commission back and then you end up getting an agent that’s not as good or doesn’t understand your needs as much. And so it wasn’t true that all agents were the same. Side note, if you want to get a good agent, use BiggerPockets Agent Finder and find an agent that actually is on BiggerPockets and understands what we’re doing.
So this new idea that, hey, we can solve all the mystery and complexity of real estate investing with one app that you could just get in and get out and buy a house is just nonsense. It won’t work. Those of us that do invest in real estate know that it takes a massive commitment. That’s why we’re here on this podcast several times a week, putting out information because that’s how important it all is. So I would hope that it might be useful, it might be helpful in accomplishing some of the elements of a real estate transaction. I can’t say that it wouldn’t be, I haven’t seen the app yet. And so I would look at it from that perspective, but I wouldn’t assume that buying a house is ever going to be something that you just, it’s like buying groceries at the store. It’s never going to work that way.

Dave:
Yeah. All right. I’ll reserve my opinion, but Henry what’s yours?

Henry:
I wish I had some maracas or a tambourine, something to make lots of noise. This is total noise. You think about Zillow-

Rob:
Okay man, I’ll be your maraca.

Henry:
That was awesome. No that’s noise, man. Look, Zillow’s a publicly traded company and they’ve had a rough year. They’re down 66%, their stock price is down 66% over the last year. And so they’ve got to try to do something to get that stock price up. They are trying to stay face in the eyes of their shareholders I’m sure. Now are they great at what they do? Yeah, they’re a big real estate information, even some would say technology company. And so sure they have the power to do great things. Is this that? No. To me, the sounds like they’re trying to rally the people behind them, get that stock price up a little bit, get some more momentum. And so nah, noise to me.

Dave:
All right. No Zillow boosters in the group today.

David:
Dave, can you give us a quick take on if you think this is news or, you may have a contrarian opinion I’m concerned.

Dave:
No. I think it’s the same thing that Henry was saying. I think that it’s a publicity stunt. What does a super app even mean? Wouldn’t they already have been trying to do this for years? It doesn’t sound like they’re actually doing anything differently, they’re just rebranding their app.

David:
That’s a very good point.

Rob:
Is Zillow not the super app? It’s like they’re going to make a whole nother thing that’s different?

Dave:
Yeah. Well, we’ll see what happens.

David:
Maybe we should all do that. Can we rebrand ourselves? I’m going to now be Super Dave, Super Rob, Hammer and Henry

Rob:
Super Henry, Hammer and Henry.

Dave:
Hopefully you’ll get as much press as Zillow did for this.

David:
Yes.

Dave:
But for our last headline, I have a very special one and it reads, the BiggerPockets Real Estate Podcast is very excited to announce that Rob Abasolo will be appearing on the podcast weekly as the new regular co-host of the podcast alongside David Greene. And in further excellent news, Henry Washington will be continuing to be an important part of the show appearing regularly as a guest host alongside David and Rob. Rob I’ll just start with you, is this news or noise?

Rob:
This is news. Oh my goodness, I can’t believe that we’re here. It feels like just yesterday I was making my very first appearance as a guest on the BiggerPockets Podcast. And six months later here I am getting to share the mic with one of my real estate heroes here, David Greene, and Henry you’re one of my heroes too, man. So I’m honored to be here-

Henry:
[inaudible 00:17:01] Henry there I did.

Rob:
I’m doing my best here guys. And I’m going to do my best here to share all the knowledge that I have to the world and hopefully make real estate just a little bit more approachable for everyone looking to get started in this journey.

Dave:
Awesome. Henry, what are your thoughts?

Henry:
Hey man, this is absolutely news and I want to congratulate Rob. That’s super awesome, this is so much fun. And I just can’t appreciate you guys enough for even providing this opportunity for us. I have been this BiggerPockets follower for a long time. And so right when I started investing, I put on my vision board a picture of the old podcast tile that had David’s face and Josh’s face and Brandon’s face. And then the BiggerPockets logo, because I had a goal to try to become a guest on the show and they gave me that opportunity. My second year in real estate, I had done 30 deals and they were like, “Well, come on the show and share your story.” And I was just so taken aback by that because I didn’t think what I was doing was that special.
And they saw something in me that I didn’t even see at the time and provided me this opportunity to share on the platform that inspired me so much. And that was only my second podcast interview that I had ever done. And so them believing in me and giving me that opportunity. And what’s funny was I just never took that off of my vision board, it’s still there today. And then all of a sudden you look back a couple of years later and I’m getting this opportunity to become this reoccurring host and share my journey and my insights and knowledge and information with people and hopefully inspire even more people to get in this game of real estate and to have a heart for people as they do it. So I couldn’t be more thrilled. This is absolutely news to me, and thank you so much for the opportunity.

Rob:
Your sound bite was way cooler than mine. Did you rehearse that in front of a mirror, what the heck?

Dave:
Rob, I’d give you another crack at it, but I think they’re going to tell me that this is already going too long. But it’s big news, I think it’s worthwhile. This is really exciting guys and both extremely well deserved from you, but let’s hear from the big honcho, the big cheese. David, what’s your thoughts on this?

David:
I am very excited to be having some backup firepower here. In all seriousness, hosting a podcast like this comes with a lot of weight. There’s a lot of people that listen to us and make decisions based on the information and the guidance and the influence that we have. And so I feel very good that Henry and Rob are two people who will be throwing in their two cents, because I don’t believe that they’re going to lead people astray. I think that they both run sound businesses, they’re both men of integrity. That’s very, very important when you’re picking who we’re going to be putting up there as giving advice. So I was very worried about this decision because it could have an amazing consequence or it could have a terrible consequence. Either way, it’s going to be big. And I think we got the right people, so I’m very excited. Welcome to the family boys.

Dave:
Welcome, this is awesome.

Rob:
Happy to be here. Thanks.

Henry:
Thank you.

Dave:
And before we go, before we end this segment, I do have a couple other pieces of news that are very exciting as well. First and foremost, I will continue to join the show monthly to co-host the Bigger News Show, so of course I think that’s exciting. And if you like the Bigger News Show, which I hope you are, because you’re listening to it right now and you like this news or noise segment, we have a lot more of this coming in the near future. We’re actually developing an entirely new podcast designed to help you understand today’s changing market dynamics and help you make informed investing decisions on your journey to financial freedom.
I actually am going to be the host, Henry is going to be super involved and we have a bunch of other experts who are going to be joining that show as well. So make sure to stay tuned for more announcements as to when this is launching, it’s going to be a lot of fun. So that was a lot of announcements, but I’m done now. So Henry and Rob, unfortunately I have to kick you out, although this was a lot of fun. Super excited for you guys. You guys have done an incredible job and really deserve this. And with that, David, I think you and I are on to interview Daren.

David:
Yes. I can’t wait to be doing this show with you. This is one of my favorite projects that we’re doing, the Bigger News Show. And Dave, here’s what I’d like to say to you because I only got to talk to Henry and Rob, Brandon and I may have had history, but you and I have chemistry.

Dave:
Ooh, I’m going to blush. Can you guys see this right now? I know, I got little chills right there. That’s quite a compliment, but David, I do love hosting this show. I think it’s so much fun and we’re getting such a good reaction to this and I don’t know, hanging out with all you guys is something I look forward to every single month. So I’m glad that we’re all going to be doing it together.

David:
Me too. This is awesome. Guys, welcome and I will see you soon.

Dave:
All right. Well that was a lot of fun. I’m very honored that I got to make that very big announcement and excited for you, but we also have a great show today. In addition to this announcement, we now have a great guest who’s going to come on and talk all about the state of foreclosure. So if you’re like me and you’ve heard a lot of news out there about foreclosures and what’s coming down the pike, you’re going to want to stay tuned to this one, because Daren’s going to drop some really good information for us. With that, let’s welcome Daren Blomquist who is the vice president of market economics at Auction.com. All right, Daren, thank you so much for being here. Before we jump into the meat of all the data and information I know you have in store for us, can you just tell people really quickly what it is that you do, what do you spend your time looking into, the type of research you’re up to at Auction.com?

Daren:
Yeah, absolutely. I’m vice president of market economics here at Auction.com. So what I spend my time doing each day, I spend lot of time just in the data, in our own data. We have a rich data set of folks coming and bidding on properties on our platform. So as you can imagine, that’s a pretty rich data set almost real time. And then also just looking into a lot of other data that we’ll talk about today, I think, and trying to figure out what that means for Auction.com as well as for our sellers, which are the banks and the servicers and the lenders who are selling these properties as well as our buyers, those are probably more aligned with your audience, folks who are looking to buy these foreclosure properties. And so what’s coming down the pike for our company, for our buyers and sellers is a lot of what I spend my time doing and it’s really fun.

Dave:
Great. Well, thank you so much for being here. I’m sure our audience is going to be super interested in learning all the things that you have to share with us. One of the things that I’m really excited to talk to you about is just foreclosure volume. And there’s just been this narrative in the real estate media recently, or if you watch YouTube a lot about a foreclosure crash and people have all this fear because there has been a moratorium on foreclosures. And once that has been lifted, is that going to cause a huge ripple through the whole housing market? And I want to get into all of that first, but before we do, could you just share with everyone a little bit about the history of foreclosures. Probably over the last 20 years, what happened in the great recession and relatively where are we today compared to everything that happened back then?

Daren:
Yes, absolutely. Especially right now and during the pandemic, that’s a lot of what you talked about first there, which is, is there going to be this huge wave of foreclosures is a lot of what I am looking at and trying to answer for because that makes a big difference for Auction.com. But the historical perspective, the way that we look at it is what we call foreclosure BTA, which is foreclosures brought to auction. And I think most people would understand that as just properties that are foreclosed on, properties that complete the foreclosure process. And there’s one of two outcomes, which is at that auction there’s either the property is sold to a third party investor who’s buying the property or it goes back to the bank as an REO or real estate owned by the lender. So that foreclosure BTA number is what I’m going to hang my hat on for using this for the historical perspective.
And we could do it as percentages, but this is actually going to be raw numbers. So at the height of the last foreclosure crisis, it was 2010, we saw about a million foreclosure BTA, foreclosures brought auction, in 2010. And that was the peak of the last crisis. We saw about five years there where it was well over 500,000 half a million a year from 2008 through 2012, 2013. Those were the worst of the foreclosure crisis that I think is still pretty, even though it was a decade ago or more, is still pretty fresh in folks’ memories. And there’s a lot of concern or anticipation that this could happen. And so to put that in perspective, what we saw in 2019, the last year before the pandemic, which is a whole different animal was we saw about 215,000 foreclosures brought to auction in that year. And so we’re at less than a quarter of that peak year in 2010.

Dave:
What would you consider normal? So on one hand we add a million around 2010 and then right before the pandemic, you said about 215,000. Is that what you would normally expect to see in a year?

Daren:
Yeah. It’s a little tough, because of course the whole market is expanding as we go. But prior to the last crisis we were seeing about 200,000 a year in 2004, 2005, 200,000 to 250,000. So I think 2019 we were getting back to about normal. Now we could talk about, and maybe we’ll do it later or now, but there was still a fairly healthy percentage of these 2019 foreclosures that were still tied to the last crisis. And so there’s an argument there that it probably could have gone down a little bit more, I’m waffling obviously on this answer here, but I think normal is around that 200,000 level when we look back over the last two decades.

Dave:
Okay. So 200 about normal and then walk us through what has happened in the last couple of years. We all know the housing market has been nuts, but can you give us a little bit of context about what has been going on in the foreclosure market in the last two plus years?

Daren:
Yes. What we saw after the pandemic hit was there’s a pretty immediate response politically and policy wise to prevent another wave of foreclosures. And so there was a foreclosure moratorium that was put in place pretty much at the end of March through the Cares Act, that had a lot of other impacts on the economy and the housing market as well. But we saw one big one was the foreclosure moratorium and then also a nationwide forbearance program. So one thing on the moratorium, it wasn’t a true moratorium, but there was still some foreclosures happening, but basically it did stop most foreclosures. The big exemption was properties that were vacant or abandoned. And so we saw foreclosure activity really almost dropped to nothing for a couple of months. And then slowly has started to come back as banks got more confident that they knew that properties were vacant and they could foreclose on them.
And then of course in the last few months, we’ve actually seen the expiration of that foreclosure moratorium, which we can get into a little bit more, but also the forbearance program, which allowed people to basically… It was actually a financially savvy move to go into forbearance some could argue, because you could basically get up to 18 months without making your mortgage payment and really no penalty, and just start making your payments at the end of that. And then the unpaid balance is put into a non-interest bearing, basically loan that goes to the end of your mortgage. But anyway, the forbearance program also those 18 months are expiring for many people. And so the majority of people have exited forbearance and there’s another few hundred thousand that will be exiting over the next six months. As those protections expire, we are seeing the tide of foreclosures start to lift.

Dave:
That’s a great point. I just want to make clear for everyone who’s listening to this what the forbearance program was and what it exactly does, because you made a really good point there. Basically at the end of March in 2020, there is a program that allowed people to basically stop paying their mortgage. And this doesn’t mean that their debt was forgiven, it means that they basically put it on pause. And the payments that they skip for most parts, it’s not the same for everyone, for most parts, just get added to the end of their mortgage. You have a couple more months or years of payment, 18 probably.
And I think this is a really important point because we saw this huge amount of people going to forbearance. And I think that is a root cause of a lot of the fear that people have, that there is going to be a foreclosure crisis. But if I’m getting you right, Daren, it sounds like what you’re saying is some people were just opting to go into forbearance even if they weren’t in a poor or difficult financial situation, they were just doing it because they didn’t want to pay their mortgage. They said we’ll just stack some cash for 18 months. Is that right?

Daren:
Yeah, absolutely. I think you see that happening with the proactive and early on in the pandemic, people didn’t know it was going to happen. And so, hey, I take this payment off the table that I don’t have to make just in case something bad happens. But what we saw is that from the vast majority of those people, the worst case scenario did not happen. They didn’t lose their job or they got their job back fairly quickly. And so that resulted in the vast majority of those forbearance… According to Black Knight, 8.3 million homeowners entered forbearance over their entire life have entered forbearance of the program. And of that 8.3 million, we only have 578,000 that have exited forbearance and are not in any type of loss mitigation, which would also protect them from foreclosure. And so that 8.3 million, if that were to be the number that were to hit the market, that would be a lot scarier, but we’re talking more along the lines of less than a million folks who are still in what I would consider that high risk category, that 578,000.

Dave:
That’s great. And I want to jump into that number, but would love David, to hear what are your thoughts? Are you seeing any foreclosure activity in your market? Do you think the forbearance program largely was successful?

David:
I think it was successful from the sense that it was popular, people really liked it. It gave people the sense of, “Hey, you’re going to be okay.” It’s hard for me to comment on how useful or necessary it actually was, because I don’t know how many people did lose their jobs. I’m seeing zero foreclosure activity in the market that we’re working in. And frankly from my position, it’s very difficult to see how we could have foreclosures when asset prices have risen at the degree that they have. So in order to have a foreclosure, from my perspective, you need two things. You need the inability to pay your mortgage and the inability to sell your house.
And what we saw in the last crash was that was happening is people didn’t want to pay their mortgage or they couldn’t pay their mortgage and value of the assets was dropping. So they were stuck with it and they just let it go. But nobody would do that now, you would just make a bunch of money by selling the house, even if you just bought it a year previous. So I wanted to ask you, Daren, there is a huge contingent of people that are banging the drums saying there’s a wave of foreclosures coming, don’t buy real estate, don’t jump in early, the white walkers are approaching the wall and they’re all coming and we have to be ready. What are your thoughts on what you would need to see before you could put more credibility towards that position?

Daren:
To your point just a second ago, we’d have to see home price correction or crash. And that it’s a two-pronged thing, you’re always going to have foreclosures because you always have folks who get into a difficult life circumstance, but typically you have to have a double trigger to get folks to actually get to foreclosure. And so you have that life circumstance, but then you also have little or no equity in the home, as you mentioned. Now, I do want to jump into that because there’s actually some research out there that pushes back on that a little bit. It’s like equity is not the panacea for foreclosures, we actually see people going into foreclosure with equity.
And I think that maybe speaks to people, we all know humans are not completely rational beings, so they don’t always behave rationally despite economics suggesting that they should. But anyway, that may be a separate topic, but I think by and large, for most foreclosures, you do need that combination of unfortunate shock life event and then also lack of equity to see that wave. And it’s funny, I hear a lot about it but I’ve actually never encountered anybody that I can remember who’s arguing that we are going to see a wave anything along the lines of what we saw last time. And maybe I just need to get out more and talk to more people, but we’re definitely not seeing that in the data.
However, we’re also not seeing the zero foreclosures that you talked about in your market. We’re seeing right now in the fourth quarter, basically every quarter, every month, since the second quarter of 2020, where we saw our numbers drop dramatically, we’re seeing now record numbers of, I shouldn’t say record numbers, but pandemic highs in terms of foreclosure level. So in the fourth quarter of 2021, we saw foreclosures up 97% from a year ago from a very low number, but they’re still at 38% of what they were prior to the pandemic. So I just want to nuance that a little bit we’re not seeing the wave, but we’re not seeing nothing either.

David:
When I say we’re not seeing them, what I mean is they’re not making their way to the market where a person would see that house in the MLS as REO or a foreclosure. I’m sure people are going through foreclosure. It’s funny you said that because my very first venture in a real estate was working with my first mentor Tim Road. And we would find people that had been issued notice of defaults, and we would go try to buy their house from them before it foreclosed. And because they did have equity and they didn’t know what to do, they were just frozen or sometimes they didn’t have enough time to get it ready, put it on the MLS, get it a 30 day escrow to close. They would’ve lost the house before then because they waited too long. So we would target those people and buy their house so that their credit wouldn’t take a hit and we’d get a deal that way.
So I’m sure that it’s still happening, like you said, in cases. It has to happen at a large systemic level before actually that inventory makes its way to where the public, who just looking on Zillow or Realtor.com would see, “Hey look, there’s foreclosure right there.” The people that are very savvy that are in the game, that are maybe looking at Auction.com, that are going to the Courthouse Steps, they’re going to be the ones grabbing those type of deals. Side note, pick out BiggerPockets book, Bidding to Buy, if you want to get into the auction game. They wrote a book about that very topic. But I think Daren, what I would like to see or to know from you as someone who tracks this data all the time, at what point would you be concerned that there’s going to be for… What do you think historically would need to happen maybe in our overall economy before we would be getting into that danger zone where a wave of foreclosures is likely to be coming?

Daren:
Yeah. I think right now the biggest threat I see, the biggest risk I see is inflation, which I know gets a lot of press and a lot of talk time. But I do see that as a risk, even if we look back over the last decade, which has been a very long housing boom, the points of weakness in that housing boom were when we saw mortgage rates rise, it’s extremely mortgage rates sensitive housing market. And so to the extent that inflation would push up mortgage rates, which they already have, or at least the threat of the Fed raising their interest rates has done that. We would see weakness in home price appreciation. And we saw that there’s two examples of that if we look back at about 2013, 2014 mortgage rates went above 4% for an extended period of time, as well as 2018, 2019, we saw that same thing.
And actually I look at the public record data shows we actually had a very, very slight at least flattening and even 1% decrease in home prices at least nationwide in 2019 and the NAR numbers don’t show that. But that was another point where we saw an extended period in 2018 and 2019 where mortgage rates went above 4% and went above even 4.5%. And that did definitely cool demand and cooled home price appreciation, at least at the very least slowed it down. And so I see that as a big threat that not only would trigger that slowdown in home prices, but also psychological factors are very important. And then everybody thinking, oh, the market is slowing down. And that becoming almost a self-fulfilling prophecy as well is the biggest risk I see right now.

Dave:
So it sounds like, basically summarizing the first part of this conversation, we are seeing an uptick in foreclosures after the forbearance period ended, but you’re not seeing a lot that suggests we’re anywhere near 2007 levels. And frankly, as David pointed out, it’s not really hitting the market in any way where it’s really impacting inventory. We’re seeing inventory numbers in January and February right now that are near all time lows. So I think hopefully that addresses some fear that people or our listeners have about foreclosures, but there’s also this other part of foreclosures that are really relevant to real estate investors, and David hit on this, and that’s the role of investing in foreclosures. And Daren, I’d love to get your thoughts, but before you do David, I’m curious, can you just give everyone a little bit of a primer about how you invest in foreclosures, why people do it and what role it plays for real estate investors?

David:
Yeah. Well, basically the reason you want to be investing in a foreclosure is because you’re getting a distressed asset so you’re probably getting it at a better price. That’s a short answer. Most foreclosures are not in the best condition that they would ever be in because the person who’s losing them probably wasn’t taking care of them very well. And the person who’s selling it we should also probably define there’s the foreclosure process, which is the act of taking a property, the title back from the owner and giving it to the person who lent on it. And then there is a property that has been foreclosed, which is owned by the lender who gave the loan on it. We typically would call that REO or real estate owned, because most of the time the lender would be some kind of bank. So there was a time when a bank owns a lot of real estate and they’re not very good at owning it, they’re not property managers, they don’t know what to do with it.
They’re usually going to sell it at a discounted price because they want to get out from under that. They want to turn the REO on their books as an asset that the bank owns into money that they’ve received back, that they had lent out and put it on their books in that fashion. When there’s not a lot of them and there’s still a lot of demand for housing, a foreclosed property goes back to a bank, a bank hires a real estate agent like me, I go put it on the MLS and I sell it just like any other house. And so that is misleading when you think that foreclosure automatically means great deal, that’s not the case. It’s when it’s distressed asset that you’re more likely to get a great deal or the seller is in a time where they need to get rid of the house. So something in the foreclosure process, the owner still has title to the property, the bank has not taken it, that could mean distress.
There’s absolutely an opportunity there where they would let it go for less than it’s worth, because they’re going to lose it anyway. But once it goes back to, I’m saying bank because in most cases the bank is the lender on the property that will take the title, it only becomes a distressed asset if that bank wants to get rid of it very badly and is willing to let it go at a lower price. And that’s only going to happen when it’s sat on the market for longer than the average days on market. So in 2010, 2011, we were seeing houses would just sit there forever and they were owned by banks. So you were getting them at better prices than the regular seller, they were also in worse shape. But today man, it’s like pouring a glass of water on sand at the beach. That inventory just gets sucked up so quick that the fact that it’s REO or in the foreclosure process or a house that isn’t there, it’s all the same to the end buyer.

Dave:
Yeah. That’s a good point. And just to be clear, there are some challenges with foreclosures too. Usually it’s site unseen and you have to pay all cash, is that right?

Daren:
Yeah. I can jump in on that one and I think that’s a good distinction, a good overview by David about the difference between foreclosed versus in foreclosure. And those foreclosed properties that are on the MLS are going to be more like a typical sale. And those would be you wouldn’t have some of those challenges, but if you’re buying and you’re going to get that distress discount, there are some challenges that basically come along with that. And if you’re buying at the foreclosure auction, typically in most states, you have to pay on the spot cash so people are bringing cashiers checks to the auction. We do have a remote bid now on our app where you can actually put funds in an escrow account and pull out of that to pay at the auction in many counties, which we’re trying to bring foreclosure auctions into the 21st century a little bit.
That’s one challenge. And then related to that, the reason that you’re paying cash is because you’re buying these properties. The property is transferring from that distressed homeowner to you, and so up until the point of the auction, they own the property. It’s going to be very hard to go in and do an interior inspection of the property, get a full appraisal of the property that would even qualify it for financing. And even if you could, the condition of the property often is such that it’s not fanciable. And so that’s why we love our buyers is because they’re not just Joe or Sally buyer down the street, they’re the ones that are ready, willing, and able to take on these challenging properties and renovate them and return them back into the retail market six to 12 months later, a lot of times. So I would say it’s three pronged to the cash piece related to the financing piece, which is related to the condition of the property and the renovation required.

Dave:
Yeah, that makes sense. And I think as we talk about on the show all the time, if you’re going to look for a deal, you got to do a little bit of extra legwork. It’s pretty hard to just find an excellent deal. And so just like with driving for dollars or doing bar with a rehab, you’re going to have to do some work to find a deal. And this is just one example. Daren, I’m curious given everything that we’ve talked about, the condition of foreclosures today and the housing market and the state that it is, what do you see the role of the foreclosure market playing in the broader housing market, the broader housing picture in 2022?

Daren:
Yeah, I think it plays a role. It’s a small, it is a little bit like pouring water on the beach, but it is adding some inventory back into the market and it’s taking these properties that tend to be much older, when we look at the average age of these properties, in poor condition and the folks who are buying them on our site are then rehabbing those properties. And typically in most cases, not all the cases, sometimes they’re holding them as rentals, but what we found in the majority of cases, our buyers are actually selling them back to an owner occupant and these properties tend to be on the lower end of the market. And so in my view, this foreclosures are actually providing almost a refurbishing of housing inventory.
And again, it’s a small piece. It’s not going to solve the affordable housing issues that we have or the housing supply issues completely, but it’s one piece of the puzzle that is taking these properties and putting them back into the market. And so we see 71% of our buyers who then renovate and sell back to an owner occupant and even in low income since this tracks, it’s 68% sell to an owner occupant and in minority tracks, 70% sell to an owner occupant. So we see that as actually a good thing in the long term. Of course, it’s never great to talk about someone losing their home, but when you see what’s happening to those properties over six to 12 months.
And we would argue that our buyers do a lot better job than the banks. And one thing I wanted to mention to what David said earlier is one huge shift with the pandemic we saw is that at the foreclosure auction, I talked about there’s two things that can happen, it can go REO, or it can go to an investor. Prior to the pandemic, only about 40% of properties were selling to an investor at the foreclosure auction and the rest were going REO. It’s completely flipped during the pandemic, which is why you’re seeing that fewer of those REOs, what we call our sales rate is now 60 plus percent going to investors at the foreclosure auction and the remainder going REO.

David:
And that makes sense because there’s more demand for these properties.

Daren:
So there’s a lot of demand, yeah.

David:
That’s exactly right. People are going to want to buy them at the auction more, whereas before they probably only just took the cream of the cup and everything else went to REO.

Daren:
That’s right.

David:
So here’s a question for you, Daren, if somebody that’s listening here wants to get into the auction game, they want to buy these properties before the title transfers back to the lender, what are some things that they need to be aware of as they prepare for this so they’re walking in with their eyes wide open? Just as far as how they need to be prepared, how the process will differ from traditionally buying?

Daren:
I think the number thing is you do have to have some dry powder, some cash to go into this with. And so it’s not one of those things where you… Now that said, there’s some very low price properties and there’s new people getting into this. We have some great buyer stories you probably don’t have time to get into, but people I’ve talked to who have actually started doing this during the pandemic and had never been an investor before. So it’s possible, but you do have to have some foundation in terms of capital going in typically.
And you can sometimes work with hard money lenders or private lenders to help with that. So I would think that would be the number one thing. I would say, anybody who’s considering this, I would advise to go to a live. These foreclosure auctions are in-person events. Now we have the mobile app that allows you to participate remotely, which is really cool, but I would encourage someone going to just attend the in-person auction, usually at the Courthouse Steps. And just to go there observe a few times and see what other investors are doing, what other buyers are doing and get a feel for it before jumping in.

David:
Do you have any examples, Daren, of what a deal at Auction.com done right would look like?

Daren:
I pulled some data here just over the last few years of properties that have been purchased at foreclosure auction, which is where you do tend to get the better deal. Sorry just a quick side note, we do also the REO auctions where it’s almost immediately after the foreclosure auction if it doesn’t sell, then some of the banks and also HUD does this what’s called second chance auction. And so those are still good discounts because they’re not going back on the MLS, they’re REOs but they’re auctions almost immediately after the foreclosure auction. But when I looked at our data with the foreclosure auctions and I just did as a benchmark compare the properties’ sale price to the 2022 AVM automated valuation investor terms that would be the after repair value.
And what I’m showing is those properties were selling to our buyers at auction for about 54% of the 2022 after repair value. And this is over the last five years, and then they’re selling for 88% of the after repair value. And so to put it in dollar figures the average price is $136,000 purchase on our site. The average resale by the fix and flipper is about $224,000. And that’s over the last five years. So hopefully that helps. I can’t give a specific example, but we’re seeing basically in percentage points, the value gain go from 54% to 88%. And in terms of dollar figures going up by close to $100,000 between when they buy it on their site, renovate it and then resell it.

Dave:
But that’s great, Daren, thank you. I think that’s really excellent data and for everyone listening out there and you’re considering entering a foreclosure, this could be a really good option. Or if you’re just looking for deals right now, foreclosure could be a really good option because deals are not the easiest they have ever been to obtain right now. Daren, before we jump off, is there anything else you think we should know or our listeners should know about foreclosures, what’s happening in the market or the opportunity there before we let you go?

Daren:
To circle back to what we talked about early on is you are going to see some pretty big percentage increases and they might be in the headlines. And so at first blush that might look like confirmation that there’s this foreclosure wave coming. But for instance, I just looked at the Black Knight data and January there was a 700% increase in foreclosure starts. So when you look at that, you’re going to think, oh, maybe there’s another foreclosure wave and just be very cautious with that because we are seeing foreclosures come back, but they’re coming back from almost nothing. And so it does spell more opportunity, but at this point, at least we’re not seeing it be this overwhelming wave that’s going to pull down the rest of the market with it at all. It’s more of just finally there’s some of this inventory that’s becoming available that investors can access, but just be wary of those headlines coming out over the next few months and weeks.

Dave:
I was going to say, well, that’s a perfect tie in with our first segment where we were talking about news or noise and, Daren, just for reference, we were talking about whether certain real estate stories were important or not. So I think that was a great way to summarize this conversation that foreclosures are coming up. But if you hear that, keep in mind that this is a recovery from almost all time lows or basically artificially low. And that does not mean that there’s going to be a huge wave of foreclosure. And after everything we’ve learned today, keep in mind that there is a lot of stuff that would have to happen to see a big foreclosure crisis in the US, at least in the next six months to a year who knows what’s going to happen after that?

David:
Yeah. I think that’s a perfect precursor to the point that I was thinking of Dave. Daren, you said something incredibly insightful I don’t want to get passed up, you mentioned that it was something along the lines of the psychology of the buyer plays a very big role when you see a foreclosure crisis. So we had that in 2010 and this is something I just… Because I sell a lot of real estate, I own a lot of real estate, you realize how few human beings make decisions based off empirical data and how much emotions go into it. And one of the huge things that affects people is the herd mentality. When you don’t know really well what you’re doing, you just follow what everyone else does and it feels better. So we had a run up in prices from say 2000 to 2006 or so based off of really bad lending, everybody was buying houses. None of them had any idea what they were doing.
They did not know if a property would cash flow, they didn’t know how to manage a property. It was literally just buy it, wait and you could sell it later, because it’s going up. So that was herd mentality on the offensive side. And then a lot of those loans started to reset. And so people couldn’t make the payment anymore and they would sell the house if they could, but enough of them resell at the same time that too many houses hit the market for sale and people didn’t buy them right away. And then they started to foreclosed, which meant more inventory was hitting the market. And you saw this little shift just went right over the edge where it went from there’s not enough homes and everybody’s buying them to, I don’t want to buy a house what if the prices are going to keep going down?
And so what happened is it’s not like 10% of the market backed off and said, “Hey, I want to wait and see if prices stabilize.” It was 98% of the market backed off and said, “I’m not touching a house because I think prices are going to come down.” And then prices started coming down So even more people said, “I don’t want to buy a property prices are going down.” And then people that worked in those industries, the lending industry, the real estate industry or people that worked in luxury markets, they sell boats or they sell time shares or that type of thing. No one’s taking out money on their house to go buy that RV or that new car or that boat. So now they’re losing their jobs and now they’re starting to lose their houses to foreclosure. And it just went so fast as everybody did the same thing. They all said, we’re not going to buy and prices kept coming down and it never slowed down. They just plummeted because nobody wants to step in and catch the falling knife, so to speak.
And it wasn’t until it hit the bottom and investors basically changed it. They said, “I could buy that house and it could cash flow and it doesn’t matter if it keeps dropping in price, I don’t care. It’s going to cash flow, I’m going to buy it.” And then investors started to buy, houses started to come off the market a little bit and then the masses said, “Oh, it’s time to buy.” And everybody came in again and boom prices shot up just as fast as they had come down. So while we talk about the individual owning real estate and we want them to understand the skill of operating a property, the metrics involved in its value, how to make sure that you’re making money, individually those things matter. The way that property values go up or down is largely psychological. It’s what the masses are all looking at. And most of them are not listening to this podcast, unfortunately that’s the case they should be. And so they’re just following what the herd says.
And you made a great point. The foreclosures are coming, but they’re not going to overwhelm the market because the psychology of the buyer right now is there’s a lot of inflation, I want to invest in real estate, it’s a limited supply. I need to get it before there isn’t any of it. Our population continues to grow, so there’s still a big demand for housing and we’re not building enough of it. And so the things that make somebody think I want to buy real estate psychologically are still very, very strong. And on the other side, if that changes, it changes quickly. It’s not something that, oh, we’re starting to see a slow down in prices and they tick back down over a five year period. So people like you listening to podcasts like this is very important, because you want to be one of the first people to know if it looks like it’s starting to hit that tipping point going over the edge.

Daren:
Yeah, totally agree. Good stuff there. And we do have a scenario, our most likely scenario, our forecast is seeing over the next five years, about 200,000 to 250,000 foreclosures per year. But we do have a scenario if that psychology turns. If home prices drop, we see that falling knife scenario we are seeing in that model, the volume go up to over 400,000 foreclosures a year, which actually still is not the recession level or last recession level, but the path could vary, it’s certainly not set in stone. If we knew that for sure, we probably wouldn’t be talking about it here.

Dave:
All right. Great. Daren, thank you so much for joining us and sharing all this information with us. It’s super helpful for us and for our users. Really appreciate you being here.

Daren:
Thanks so much for having me. It was great.

Dave:
So Daren now, before we go, where can people connect with you or learn more about Auction.com if they’re interested?

Daren:
Yeah, absolutely. Auction.com, you can just go there and there’s no subscription fee or anything like that. Just to look at properties and to actually bid on properties. Of course, you have to have the cash to if you’re the winning bidder. So check it out Auction.com. And then a lot of the research I’m doing if you go to auction.com/inthenews, you’ll see that. We have heat maps about where we see foreclosures emerging and things like that, that could be very useful to the audience. As well as some great buyer stories of people who’ve been in the business for decades as well as people who’ve just gotten into investing over the last couple of years and are specifically buying at foreclosure auction or bank owned REO auction. And so I think those are some great resources, that’s auction.com/inthenews to see all of that.

Dave:
All right, good stuff. Thank you, Daren.

Daren:
Thank you.

Dave:
All right. David, well, there you have it. There dropped a lot of information. What are your thoughts on all this?

David:
It was a lot of data, which I think frankly we needed because there’s so much controversy about this issue. I think this was the perfect guest to give us some clarity on it. It sounds like though many of us that are investors are hoping for a wave of foreclosures. It’s not very likely to happen and that the market fundamentals for real estate still seems strong even as the price of it continues to rise.

Dave:
Yeah. I’m glad to see this and hear it from someone who’s as engrossed in this data as Daren is, because I put out a lot of YouTube videos and I’m on YouTube a decent amount. And you see these people who are screaming about a foreclosure crash and a forbearance crash and all this stuff. And frankly, I’ve always thought it was overblown and I’m glad to hear that that’s the case. Now there’re of course additional challenges to today’s housing market, but there is one last thing you have to worry about is a foreclosure crisis. So if we’re going to round this whole show out, I would say that thoughts of a foreclosure crisis is noise and not news.

David:
All right. Well, thank you very much audience for listening to us, and Dave, thank you for doing a stellar job with the interview that we just took down of Daren Blomquist. You are getting better and better at this the more you do it. Everybody, go check out Dave on YouTube, he’s got some really good stuff. You can also follow him online on social media at thedatadeli-

Dave:
Thedatadeli.

David:
There it is. You can follow me at DavidGreene24 on all social media. Dave’s name is way cooler than mine. [inaudible 01:00:19] the datadeli is awesome because Dave loves sandwiches. So thank you very much. This is going to be the end of our show. So go check out another BiggerPockets Podcast or follow us on YouTube and see what you think there. This is David Greene, for Dave, thedatadeli Meyer signing off.