Will There Be a Wave of Foreclosures In 2021 for Southern California?

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Many people are wondering if 2021 will bring a wave of foreclosures in Southern California after the economic downturn caused by the Coronavirus. Currently, under the CARES (Coronavirus Relief and Economic Security) Act, homeowners have been provided foreclosure and eviction protections in 2020, which was extended through March 31st, 2021.

Put in place back in March, direct mortgage servicers are required to halt all new foreclosures and suspend any that are in progress for FHA properties. It also stops evictions from these properties. But what happens once these forbearance protections run out? Many fear that we will see a repeat of 2008 with a market crash and a huge wave of foreclosures. However, that’s not what we see in store for 2021.

With the moratorium on home foreclosures, distressed sales have dipped to their lowest levels ever, making up less than half a percent of the listing inventory and demand in Southern California. Obviously, there will be more foreclosures when these protections end, however, a crushing wave isn’t coming because this time around U.S. homeowners are more financially stable and have more equity in their homes.

Will there be a housing crash in 2021?

No, there should not be a market crash in 2021. Everyone is worried that history will repeat itself (AKA 2008), but If you look back at the last five economic recessions, only two have resulted in declines in real estate values. The bubble created by the Great Recession was fueled by subprime lending practices, which meant homeowners were qualifying for home loans they couldn’t afford. Despite the pandemic, today’s real estate market is healthy with market conditions of low supply and high demand keeping home values strong.

Tight lending qualifications continue to keep the housing market strong, and we’ve already seen a V-shaped recovery.  Approximately 7.5% of all active mortgages are in active forbearance according to a report from Steven Thomas, and of those that are past due, 77% of homeowners have at least 20% equity in their homes, and 90% have at least 10% equity. Therefore, upon exiting forbearance, these homeowners will be in a strong position to pay back the missed payments. And if they are still experiencing financial hardship and are forced to sell, most will have enough equity to allow a traditional sale and avoid foreclosure or a short sale altogether.

What will house prices do in 2021?

A rise in Southern California house prices is one of our predictions for 2021, however, they’re not expected to rise as quickly as they have in 2020. For example, home sold prices according to data from CRMLS rose 4.1% year-over-year from 2018 to 2019, however from 2019 to 2020, sold prices rose 14.6% year-over-year! Housing prices are expected to normalize in 2021 as more sellers are encouraged to put their homes on the market and buyers continue to take advantage of historically low rates. According to realtor.com’s predictions, home sale prices are expected to go up 5.7% next year.

With home values on the rise, homeowners who are vulnerable to becoming a distressed sale will see their equity positions increase in time. Some will not be able to avoid a foreclosure, but that will cause more of a ripple in the Southern California housing market than a crushing wave.

Bottom Line

While we will see more distressed homes in 2021 once the mortgage forbearance period ends, it will pale in comparison to the Great Recession. This economic recession will not cause declines in real estate values, which means buyers who’re hoping to purchase a foreclosure and secure a real estate deal may be disappointed. If you are ready to buy a home now, there’s no reason to wait.