Mortgage Delinquencies Fall Despite Interest Rate Increases

Mortgage delinquency rates in the United States are showing a promising trend, with the national delinquency rate decreasing on a year-over-year basis while interest rates are on the rise. According to recent data*, the delinquency rate declined 10 basis points (bps) in January 2023 to 3.38%, marking a 15% decrease (60 bps) from the same period last year. This positive development can be attributed to several factors, including an improving economy and strong seasonal trends.

Mortgage delinquencies may be poised to push even lower through the end of Q1. February and March typically have strong seasonal downward pulls on delinquency rates as borrowers use tax refunds to pay down past-due mortgage payments. In fact, February's delinquency rate already saw a 2% decrease, and March is expected to follow suit with a projected 10.5% drop.

This is excellent news for an otherwise struggling housing market, as a lower delinquency rate suggests that fewer homeowners are struggling to make their mortgage payments. A decrease in delinquency rates can also lead to higher credit scores for homeowners, as a late mortgage payment can significantly impact a credit score.

Furthermore, a declining delinquency rate can lead to greater confidence in the economy and housing market, which may encourage more individuals to consider homeownership. This, in turn, can lead to a boost in home sales, further fueling the housing market's recovery.

Much remains to be seen with respect to the housing market given the Federal Reserve’s continued focus on reining in inflation by increasing the federal funds rate.  Home sales hit their lowest levels in more than seven years in January 2023*. While demand showed signs of life when 30-year rates fell to near 6% in early February, recent data has shown that demand is sensitive to shifting rates.

For-sale inventory is also a growing concern, with January marking the fourth consecutive monthly decline in inventory on a seasonally adjusted basis. This has been compounded by the fact that two-thirds of mortgaged homes have interest rates that are 2.5 percentage points or more below current market rates, causing many would-be home sellers to remain on the sidelines, worsening inventory shortages and holding prices higher than they might otherwise be.

It may be a bumpy road in the coming months as the market continues to deal with volatile rates and a resurgence in inventory deficits. The market may see some relief if more homeowners decide to list their homes for sale as rates rise, but for now, the tight affordability situation is dampening demand and causing a slowdown in sales.

Although the good news is that mortgage delinquency rates have fallen on average, the bad news is that this will likely be a year of further interest rate increases.  This will undoubtedly have a negative effect on new homebuyers, refinancing options, and sellers who must finance the purchase of another home.  Stay tuned.

*Source: Black Knight, Jan. 2023