As most are well aware, this past year has been crazy in the housing market, with sustained demand and lower and lower inventories continuing to squeeze prices upwards. Multiple offer scenarios are frequent, and one wonders how long rising prices are sustainable. At this point, even a minor increase in the still historically low interest rates may make a house unaffordable for many buyers.
This article in the New York Times caught my eye and sparked this post. I have felt bearish lately with regard to the US housing market, and the article does nothing to alter my anticipation of a housing market correction sooner than later.
How soon and to what degree that will occur is the question. I found a chart from the Mortgage Bankers Association showing loan delinquency rates over the past 15 years. The thing that catches my eye here is that the rates of delinquency are even higher than in 2009-2012 for FHA and VA loans. As the NY Times article says, about 2.6 million homeowners with government-backed loans are still in forbearance, and it’s hard to know how many of these will be able to recover once forbearance ends, rather than sliding into foreclosure. Federal support may help some homeowners avoid foreclosure, but how many?
The risks may have been reduced because of the lower rates of conventional loans in forbearance, but if you look at the hard numbers published by the Consumer Financial Protection Bureau (CFPB) for site-built conventional and non-conventional loan applications and originations (the 4th and 5th rows of numbers), you can see that conventional loan originations decreased significantly over the past 15 years, and during some years, were fewer than non-conventional loan originations. Here is another CFPB chart to illustrate:
In my opinion, the fact that FHA and VA loans are now a much larger percentage of total loans, with much higher delinquency rates, increases the chances of a correction once foreclosure moratoriums cease.
As the NY Times article notes near the beginning, “the housing market — which can defy basic laws of economics even in normal times — is acting very, very strangely.” And towards the end, from Moody’s, “I don’t think it’s red flares; I think it’s yellow flares,” Mr. Zandi said. “But if we have another year like we had in the past year, we’re going to have a lot of red flares going up.”
Now that I have taken a closer look, I feel that my bearish instincts with regard to the near future for the overall housing market actually have some basis in fact. How it plays out remains to be seen.
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