Are mortgage delinquency rates going to increase in 2024?

Question

Hi BP friends!

I am curious to hear your thoughts on the real estate market outlook for 2024. Specifically on whether the high interest rates will lead to an increase in mortgage delinquency rates similar to what we saw during the 2008 great financial crisis.

I plotted the chart below (Figure 1) to compare Fed Funds rate to unemployment rate and mortgage delinquency rate. Between 2004 and 2007, interest rates increased from 1% to about 5%. Delinquency rates did not immediately increase, but they skyrocketed starting in 2007 and peaked in 2010 (when interest rates where back to zero). My point is that observing the 2008 GFC it seems like interest rates are a leading indicator for future delinquencies, and that delinquencies tend to lag by about 2 years.

Should we expect something similar to happen again in the current market?

The increase in interest rates follows a similar pattern as the one seen between 2004-07, however I believe that there is one major difference that makes today's market less likely to see a similar surge in delinquencies: a lower % of variable rate mortgages (Figure 2). Leading to the 2008 GFC, approximately 30-35% of mortgages had variable rate, compared to less than 5% today. If most loans locked in a fixed rate before the interest rates started increasing in 2022, they will not be impacted by rates going up. Additionally, so far the economy has shown pretty strong resilience, with historically low unemployment rates. Because of this I am not too worried about a real estate crash, although I don't exclude a correction, especially if interest rates continue to stay elevated in 2024.

Curious to hear your thoughts on this and how/if this is affecting your investment strategy.

Thanks,

Antonio

Figure 1 (source: St. Louis Fed.)

Figure 2 (source: Financial Samurai)

Carlos Ptriawan · Answer

no simply because US mortgage is using 30 year fixed note. If it's 3 Y ARM then yes it's possible mortgage delinquency is rising

Chris Seveney · Answer

interest rates are not correlated to defaults. what correlates to defaults is income and expenses. So what does that mean. Two things:

1. Loss of income leads to higher defaults. We are at all time lows in unemployment and defaults, also thanks to the govt pumping $5T into the economy. So if we are at all time lows, chances are things move more to the norm and yes we will see an increase in defaults as we will also see an increase in unemployment

2. expenses - everything is a lot more expensive and people live paycheck to paycheck. This is where and why I think we will see an uptick in defaults.

NOTE; increase in default does not mean increase in foreclosures. Most people have equity in their property and a low interest rate, so they are more likely to file bankruptcy.

We also as a debt fund have data that substantiates this as rarely does a property go to FC and 90% of the time we will see them file BK if we cannot work out a modification

Are mortgage delinquency rates going to increase in 2024?

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