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Housing Market Hears Alarm Bells as Delinquency Rate Rises

Last Updated September 23, 2020 1:55 PM
Simon Chandler
Last Updated September 23, 2020 1:55 PM
  • The mortgage delinquency rate increased in the first quarter, according to the Mortgage Bankers Association.
  • Delinquincy is forecast to grow in Q2, reaching Great Recession levels.
  • As forbearance periods end, this could cause a housing market collapse.

The U.S. housing market is in serious trouble. On Tuesday, the Mortgage Bankers Association (MBA) announced that the mortgage delinquency rate rose to 4.36% in the first quarter. Given that it had been at an all-time low in Q4, such a quick rise shows just how badly coronavirus has impacted real estate.

But with delinquency rates set to skyrocket in Q2, the housing market is at risk of collapse. Thousands if not millions of homeowners could end up defaulting on their home loans, triggering another crisis.

Delinquency Rates Surged Before Coronavirus Got Going

MBA’s National Delinquency Survey  brought terrible news for the housing market.

The U.S. mortgage delinquency rate rose by 59 basis points to 4.36% in Q1. Basically, 4.36% of all homeowners have been at least 30 days late in making their usual mortgage payments.

Mortgage delinquencies rise in U.S. housing market tweet
Source: Twitter 

Marina Walsh, MBA’s vice president of industry analysis, had little doubt as to what caused this increase:

The mortgage delinquency rate in the fourth quarter of 2019 was at its lowest rate since MBA’s survey began in 1979. Fast-forward to the end of March, and it is clear the COVID-19 pandemic is impacting homeowners.

More worryingly for the housing market, Walsh is confident that the delinquency rate will increase over the coming months:

Mortgage delinquencies track closely with the U.S. job market. With unemployment rising from historical lows in early 2020 to a record 14.7 percent in April, it is inevitable that mortgage delinquencies would increase as well.

The report is disturbing because it covers only the very beginning of the coronavirus shutdown in the U.S.

Likewise, Black Knight revealed on April 23 that delinquencies registered their first-ever March increase, climbing 3.3% . On top of this, around 6.4% of all homeowners are now in forbearance plans .

Delinquencies Could Pop the U.S. Housing Market Bubble

The picture gets worse. In April, FitchRatings predicted that the mortgage delinquency rate would reach Great Recession levels :

Although the delinquency rate has been steadily declining, and was 1.31% as of March 2020, it will now start to rise and peak between 8.25% and 8.75% by the end of the third quarter of 2020.

As Fitch added, such rates are “close to the peak of 9.01% reported in July 2011 during the Great Recession.” Given that analysts have so far underestimated much of the economic impact of coronavirus, there’s reason to think that delinquency rates could go even higher.

Delinquency rates at Great Recession-levels would be bad. Even before coronavirus, several real estate analysts were already predicting that the U.S. housing market was due for another crash.

For example, real estate analyst Keith Jurow wrote for MarketWatch last February  that existing delinquencies “were a disaster waiting to happen” for the housing market. He noted that over $800 billion of bubble-era loans were outstanding as of Q3 2018.

That was when the overall U.S. delinquency rate was only 2.69% .

Delinquency rates U.S. housing market chart
Source: Federal Reserve Bank of St. Louis 

Now, the delinquency rate is likely to hit around 9% or higher. Yes, forbearance may protect homeowners for now. But such forbearance will end, leaving mortgage payers–an increasing percentage of whom will be unemployed–with little means of keeping up with payments.

As a result, defaults and foreclosures will follow. If so, the housing market will be flooded with additional housing supply, at a time of weakened demand. This will crash house prices, while defaults will damage the market for mortgage-backed securities, which is currently worth around $2 trillion .

In other words, another housing market crash.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.