Are mortgage delinquency rates going to increase in 2024?

[Antonio Signorelli]

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)