Foreclosures Hit 7-Year High as Pandemic Relief Ends—Here’s Where Default Discounts Are Easiest To Get

Driven up by the ongoing affordability crisis, the national foreclosure rate reached its highest level in nearly seven years, with a handful of smaller markets, concentrated mostly in the South and Midwest, now claiming the greatest share of default listings in the U.S. 

Although losing a home to foreclosure is a painful process for homeowners, it presents an opportunity for shrewd buyers and investors looking to secure properties well below market value, provided they can navigate the unique challenges that come with them.

A new report from Realtor.com® tracks the recent trajectory of foreclosures, highlighting what happens when homes become Real Estate Owned (REO) and wind up listed by banks on multiple listing services and online platforms.

A foreclosed home transitions into an REO when it fails to sell at a foreclosure auction, offering the lender a chance to recoup its investment by listing the property for sale, typically as is, without any repairs or upgrades. 

During the COVID-19 pandemic, defaults plummeted due to several key federal provisions, including the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s foreclosure moratorium and mortgage forbearance program aimed at protecting homeowners at a time of a global health crisis.

Even after those programs became a thing of the past, foreclosures remained low for the next few years, partly due to significant gains in home equity, helped along by payment deferral, loan modification, and forbearance programs offered by Fannie Mae and Freddie Mac that ran out only in 2024. 

Since then, however, foreclosure rates have steadily climbed, buoyed by elevated prices, growing property taxes, rising insurance premiums, and the cost of living outpacing wage growth and making it tougher for homeowners to keep up with monthly mortgage payments. 

As of the start of 2026, the national foreclosure start rate stood at 0.24%, roughly matching the 2019 benchmark, according to Mortgage Bankers Association data reported by Moody's.

"Buyers since 2023, when home prices flattened off, are most at risk," says Realtor.com senior economist Joel Berner. "They’re newer to their mortgage and don’t have as much of an equity stake in their home, partly because the first few years of mortgage payments are made up of significantly more interest than principal and partly because their home has not appreciated as much as those that were purchased before the price surge of 2021 and 2022."

For this specific group of buyers, the risk of falling "underwater"—meaning they owe more on the home than it is worth now—is the greatest.

At the national level, REOs accounted for 1.3% of all active listings in April 2026. For buyers and investors, these foreclosures present a steep discount opportunity: The median REO home was sold for 27.2% less than its estimated value.

However, these properties come with significant hurdles.

Despite receiving 26.5% more page views on Realtor.com than typical listings, REO properties linger an average of 11 days longer on the market. This slower pace is attributed to properties being sold as is, receiving less marketing effort, and navigating local red tape.

While sprawling metros such as Chicago, Philadelphia, and Houston, TX, have the highest raw volume of foreclosure listings, with each topping 570, lower-cost markets see the highest concentration of foreclosures.

Foreclosures show legacy of climate calamities

Lake Charles, LA, a metro that is home to roughly 240,000 people, located 200 miles west of New Orleans, leads the nation with foreclosures making up over 10% of its market.

Danette McManus, a local real estate agent, says the market's high default rate is closely tied to Southwestern Louisiana's severe climate risks.

"After Hurricanes Laura and Delta, many homeowners found themselves in lengthy battles with insurance companies," McManus tells Realtor.com. "Claims often took months—or even years—to settle, and in many cases, insurance proceeds weren't enough to cover the actual cost of repairs. With hurricane deductibles commonly around 5% of a home's insured value, many families were suddenly responsible for tens of thousands of dollars out of pocket."

The agent says she has worked with homeowners who were forced to take out second mortgages or other loans just to make their hurricane-battered homes livable again, while others opted to sell because they simply could not afford to keep their homes.

"There were homeowners who desperately wanted to stay in their homes, but after draining savings, taking on additional debt for repairs, and then facing continued increases in insurance costs, they simply ran out of options," says McManus. "While every foreclosure has its own story, those experiences are part of what makes Southwest Louisiana different from many other markets."

In addition to the financial strain created by the storms, the Lake Charles housing market has been weighed down by higher insurance premiums, increased property taxes, inflation, and surging everyday living expenses, creating a fertile ground for defaults.

"Foreclosures don't happen overnight, so I believe some of what we're seeing today reflects financial hardships that have been building for several years," notes McManus.

Based on Realtor.com data, Lake Charles is showing signs of a stagnant, low-demand market. In June, active listings there were down over 26% compared to a year ago, new listings were flat, days on the market were rising, and median list prices per square foot were down.

"This is a market where overall demand has fallen enough that foreclosures make up a bigger slice of a smaller pie. And those foreclosed homes are sitting," says Realtor.com senior economist Jake Krimmel.

The economist suggests that buyers shopping for foreclosed properties in Lake Charles should be patient as prices still have room to fall. The ideal buyer is likely an investor or house flipper with time to spare, rather than a first-time buyer.

Following Lake Charles, Tuscaloosa, AL, has the nation’s second-highest share of default listings, at 7.7%, with Dayton, OH (6%) in third place, followed by Davenport, IA (5.7%), and Montgomery, AL (5.7%), rounding out the top five.

Pros and cons of foreclosure homes for buyers and investors

According to McManus, the obvious benefit to purchasing an REO home is the upfront price. Foreclosed properties are typically listed below market value, offering room to build equity through renovation.

Echoing Krimmel, however, the local agent stresses the importance for buyers to know exactly what they're getting into before closing.

"The biggest risk is that many of these homes have been vacant or neglected," she explains. "In our climate, that can mean moisture issues, mold, deferred maintenance, storm-related repairs, or other problems that aren't immediately visible."

Insurance is another challenge that McManus argues buyers seldom consider until they're already under contract.

"Finding affordable insurance on some distressed properties can be difficult, and if the home needs major repairs, financing can become another obstacle," she says. "Buyers need to do their homework before assuming they're getting a bargain."

While foreclosed properties tend to attract cash-rich investors with established contractor relationships, McManus says she is increasingly seeing everyday buyers showing interest in REOs as affordability concerns escalate.

"If the property is in good enough condition to qualify for financing, owner-occupants are still very interested," concludes the agent.

However, looking at the distressed Alabama markets on the list, the Realtor.com report highlights a major caveat the would-be buyers should be aware of before putting in an offer: the state's statutory right of redemption. This law allows a former homeowner to reclaim their property after a foreclosure sale by paying the buyer's purchase price plus interest, taxes, insurance, and other allowable charges.

Even after a buyer has closed on the property, the prior owner can legally force them to give it up, which creates serious risk, especially for buyers planning to remodel the home right away.

"If looking to buy a foreclosed property in Alabama, it's definitely more 'buyer or investor beware' than in other states, simply because of the rules and regulations," points out Krimmel.

Edge-of-margin markets

Ultimately, when considering the markets with the highest shares of default listings, economists say several common denominators leap out. These are mostly lower-priced housing markets where more renters can aim for homeownership than in higher-priced metros.

In other words, it's more realistic in those markets to transition from renting to owning due to down payments falling below the national average. However, this accessibility is as a double-edged sword for low-income buyers.

"The affordability advantages of these metros that made homeownership possible for buyers on the margin lead to a selection bias that leaves the typical homeowner more susceptible to foreclosure," notes Berner.