The Foreclosure Crash is Starting | Housing Reset.

Foreclosure filings increased by 3% in September and 19% annually, reaching nearly 37,000 properties in October. Florida, South Carolina, and Illinois lead the nation in state foreclosure filings. There are growing concerns about a housing crash in a specific market segment, driven by buyers already underwater on their mortgages. This situation is reminiscent of the 2008 financial crisis, which was thought to be a thing of the past.

A significant percentage of FHA loans originated by homebuilders like Lenar Mortgage (27%) and Dr. Horton (18%) are underwater. This is particularly concerning for new construction homes. If foreclosures occur on new construction, these properties, often just 10 years old, can be great deals for buyers as major components like roofs and foundations are likely still in good condition, unlike older homes.

Many underwater properties are concentrated in areas with new construction, creating 'housing clusters.' The risk lies with owners who paid inflated prices for new homes that can quickly become overvalued, especially with abundant new supply. When new construction booms, an oversupply leads to price declines. While most of the nation sees rising home prices, overbuilt metros like Austin, Texas, and parts of Florida have experienced flat or declining prices in 2023 compared to 2022.

Homebuilders entice buyers with attractive offers, such as buying down interest rates (e.g., to 2.99% or even 1%) and including upgrades, even if the price is higher than comparable older homes. This strategy helps them sell homes in phases and maintain rising prices, a necessity for securing construction financing. These incentives, while appealing, mask the fact that buyers are often paying more than the property's true market value.

Buyers, especially first-time or FHA buyers with low down payments, are often encouraged to finance costly upgrades, further increasing their loan amount. Immediately after purchase, the market value of the new construction often drops to the level of existing homes in the area, creating a 'negative wedge' where buyers are instantly underwater. This situation is precarious, especially if job loss occurs, making foreclosure a real risk. To avoid this, it's advised to seek properties in areas with low new construction and look for 'wedge deals' where a property is bought below market value due to needed repairs, allowing for a buffer.

The speaker demonstrates how investing in distressed properties, even 'hoarder properties,' can create value. While challenging, these properties, which are often overlooked by others, can be transformed into safe and livable homes, providing a service to the community and a good investment opportunity. The speaker's company, househack.com or reinvest.co, specializes in buying and renovating such homes, encouraging investors to explore these opportunities.