Zombie foreclosures are rising. Is that a cause for concern?

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An industry report finds 311,508 homes in the foreclosure process in the second quarter

For months some housing pundits have warned of a housing market bubble that is about to burst in a wave of foreclosures. For the first time, foreclosures are rising but at a very slow rate.

Still, with home prices near record highs and high mortgage rates cutting into affordability, it may pay to keep an eye on the rate of foreclosures, especially what are known as “zombie” foreclosures.

Zombie foreclosures occur when the homeowner is in default and moves out, leaving the property vacant. ATTOM, a company that monitors real estate data, reports 1.3 million U.S. residences are currently vacant. That’s just 1.3% of the nation’s residences.

ATTOM reports that 311,508 residential properties in the U.S. are in the process of foreclosure in the second quarter of this year, up 4.3 percent from the first quarter of 2023 and up 20.2 percent from the second quarter of 2022. Those are not insignificant increases.

Some perspective

But putting those numbers in perspective, a moratorium on foreclosures was put in place at the beginning of the pandemic in 2020 and wasn’t lifted until the middle of 2021. Among current pre-foreclosure properties, 8,752 are empty because the occupants, reading the handwriting on the wall, have moved out. But compared to pre-pandemic years, that number is very small.

“Zombie foreclosures keep inching up as lenders pursue more delinquent homeowners in courts around the country,” said Rob Barber, ATTOM’s CEO. “All indications are that the number of zombie properties will keep going up slowly, given that foreclosures are up. But abandoned properties are still nothing more than a dot on the radar screen among the majority of neighborhoods. We are still a long way from the fallout after the Great Recession of the late 2000s, when this was a very real issue in many areas around the U.S.”

Role of subprime mortgages

The Great Recession’s housing market crash was caused by the proliferation of subprime mortgages that were handed out with little consideration of the buyer’s ability to afford the house. A wave of foreclosures began in 2007 that overwhelmed the market with a huge number of homes for sale.

The situation today is very different. Lending standards are very tight and currently, there are not enough available homes to meet demand.

While most U.S. neighborhoods have little or no zombie foreclosures, some states have more than others. The biggest increases from the first quarter of 2023 to the second quarter of 2023 in states with at least 50 zombie properties are in Texas, Ohio, Oklahoma, Georgia and Iowa.

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