Foreclosures Are Rising in US as Inflation Squeezes Households

A foreclosure sign stands in front of a home in Miami Beach on Jan. 22, 2009. Joe Raedle/Getty Images

Foreclosures are rising in the United States as the inflation-driven cost-of-living crunch continues to squeeze households, with May notching a 38 percent jump in repossessions and experts warning of more pain to come.

Foreclosure-related filings—which include repossessions, scheduled auctions, and default notices—climbed to 35,196 properties in May, up 7 percent from April, according to real estate data group ATTOM. That’s a year-over-year increase of 14 percent.

The highest rate of foreclosure filings was observed in Illinois, with one filing for every 2,144 housing units. This was followed by Maryland (one in 2,203 units), New Jersey (one in 2,257 units), and Florida (one in 2,470 units).

“The recent increase in foreclosure filings nationwide indicates a trend that has been observed throughout the year, and what we have expected to occur,” ATTOM CEO Rob Barber said in a statement.

Lenders repossessed 4,020 properties through completed foreclosures (REOs) in May. That’s up a whopping 38 percent from the prior month and 41 percent from last year.

Illinois again led the way with completed foreclosures in May with 352 REOs. This was followed by Ohio (279 REOs), Michigan (271 REOs), and Texas (240 REOs).

“This upward trajectory suggests the possibility of continued heightened activity, and with foreclosure completions seeing the largest monthly increase this year, we will continue to monitor the potential impacts this may have on the housing market,” Barber said.

While foreclosure activity remains near prepandemic lows, the jump in May foreclosures is notable because it signals mounting stress in the housing market, which has been hit by rapid Federal Reserve rate increases.

As the Fed embarked on an aggressive cycle of raising interest rates in March 2022, the pace of home sales tumbled last year while price growth stalled by the start of this year.

Commercial real estate, in particular, has been in the crosshairs of analysts predicting a soft patch in the market, although some expect residential housing to suffer as well.

‘A Lot of Agony Out There’

With interest rates high and, by some predictions, heading higher, dire predictions about the commercial real estate market have been growing.

“A lot of real estate isn’t so good anymore,"  Charles Munger, vice chair of Berkshire Hathaway, told the Financial Times in an interview in May.

Munger is among numerous Wall Street giants to sound the alarm on the health of the U.S. commercial property sector amid what’s been described as a perfect storm of rising rates, declining occupancy levels, and a wave of loan refinancing at higher rates.

“We have a lot of troubled office buildings, a lot of troubled shopping centers, a lot of troubled other properties. There’s a lot of agony out there,” he said.

Two major real estate firm CEOs said in recent interviews that a significant chunk of office loans will soon face a foreclosure reckoning.

PGIM Real Estate CEO Howard Lutnick told CNBC in a recent interview that, of the $1.5 trillion worth of office loans due in the next three years, a third will either be foreclosed on or returned as deeds in lieu of foreclosure.

“Let’s face it, if rates go to 8 percent or 9 percent and your rents haven’t gone up like that, the math doesn’t work,” Lutnick told the outlet. “Give the keys back to the bank.”

Cantor Fitzgerald CEO David Hunt told Bloomberg in a recent interview that, in his view, around 20 percent of the office market in the United States will “have the keys handed in.”

Hunt said that, as tenants are increasingly leaving older buildings for newer ones, some aging commercial properties are left squeezed for cash flow.

‘Melting Down Fast’

Another trend that has swept across the commercial property market is the decline in office occupancy rates as the pandemic drove staff into remote working arrangements.

Major urban centers and midsize U.S. cities are being overtaken by “zombie offices,” according to Richard Rubin, CEO of commercial real estate management firm Repvblik.

“This is the phenomenon where an office tower or suite sits unused, but continues to operate,” he told The Epoch Times. “It’s currently happening in cities from Los Angeles to New York and all states in between, including Michigan, Nebraska, Minnesota, and more.”

With the growing odds of defaults and delinquencies and the number of loans poised to mature, there’s concern that a collapse of the commercial real estate market could create a contagion event that would spread beyond financial institutions and landlords.

The national office vacancy rate surged by 20 basis points year-over-year to almost 17 percent in March, according to CommercialEdge’s National Office Report in April.

Cushman & Wakefield, a commercial real estate services company, estimates that more than 300 million square feet of U.S. offices will be obsolete by 2030.

Tesla CEO Elon Musk recently predicted that as “commercial real estate is melting down fast,” there’s a growing risk of a spillover into the residential housing market.

“Home values next,” Musk said in a tweet.

Musk elaborated on the gloomy forecast in an interview with former Fox News host Tucker Carlson in April.

“We really haven’t seen the commercial real estate shoe drop. That’s more like an anvil, not a shoe,” Musk told Carlson.

“So the stuff we’ve seen thus far actually hasn’t even—it’s only slightly real estate portfolio degradation. But that will become a very serious thing later this year, in my view.”

Musk added that the work-from-home trend has sent office vacancy rates soaring, a bad sign for the commercial real estate market.

Andrew Moran contributed to this report.