Drop in Delinquencies Good for Housing Market

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Drop in Delinquencies Good for Housing Market

In this context, a mortgage delinquency occurs when a homeowner is at least 60 days delinquent on the mortgage payment. While not all delinquencies end up in foreclosure, the two trends do track closely together. A significant drop in delinquencies typically corresponds to a drop in foreclosure filings down the road. All of this is good for the housing market.

A large percentage of delinquent homeowners do actually end up in foreclosure. And, as we know, a high foreclosure rate can wreak havoc on the housing market. Having a high percentage of distressed properties for sale hurts the market in two ways.

First, it contributes to inventory surplus. If there is not enough demand to compensate for the added surplus, prices will drop. Secondly, distressed properties (short sales, foreclosures, etc.) tend to be sold below market value. Both of these things can erode home prices over time.

So a drop in mortgage loan delinquencies can be viewed as a positive sign for the broader housing market.

More than 80% of U.S. metropolitan areas experienced an annual decline in mortgage delinquencies. This trend was measured from the fourth quarter of 2011 to the same period in 2012. The biggest decline occurred in the Los Angeles housing market, where the delinquency rate dropped by nearly 34%. Memphis, Philadelphia, Detroit and Baltimore also had notable declines (above 25%).

We have also seen a drop in foreclosure starts in many metro areas. A foreclosure “start” is one step beyond a delinquency. This is when the bank initiates the paperwork necessary to repossess the home. Foreclosure starts hit a six-year low at the end of 2012, according to RealtyTrac.

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