Increase in Mortgage Defaults Are Not Indicative of Market Trouble
DS News: “Following the spike seen in October foreclosures from the month prior, it is only natural that an increase was also seen in the mortgage default rate according to the October S&P/Experian Consumer Credit Default Indices report, measured by changes in consumer credit defaults.
Specifically, the first mortgage default rate rose 3 basis points from the month prior. Despite the short-term increase, compared to data from the previous year, this rate decreased by 11 basis points.
DS News spoke with David M. Blitzer, Managing Director & Chairman of the Index Committee at S&P Dow Jones Indices, to discuss the reasons behind the increase and what this means for the market.
‘In the background of the last year, the mortgage default rate hasn’t moved a lot and will creep up or down from month to month, but it has been reasonably steady,’ said Blitzer. ‘The rate is just about at the levels that were seen back in 2004 and 2005 before the financial crisis.’
While increasing mortgage default rates are not ideal for continued market recovery, it should not lead to fears of widespread market instability. With that in mind, Blitzer says that an increase in mortgage defaults on a month-over-month basis can be explained by a few different trends.
‘Prices for existing homes have been rising at about a 5 percent rate and the rate of inflation is about 1-1.5 percent so it is getting pricier to buy a house,’ said Blitzer. ‘We have seen this year an increase in activity of purchasing single-family homes, which is very encouraging. With that, mortgage debts have gone up.’
‘I think what we are seeing are a lot of places in the country where people are feeling pretty good and are back buying houses and taking out mortgages,’ said Blitzer. ‘When that happens you get a few people who stretch themselves and it sets the stage for upward movement in default rates.’
Only time will tell what influence the Trump administration will have on the economy and the housing market. On his campaign website, Trump stated his vision for the economy, which included creating a ‘dynamic booming economy’ that he says will create 25 million new jobs over the next 10 years.
In light of the role the change in leadership could have on the economy, Blitzer added the caveat that this data was obtained pre-election and because of that makes it too early to tell if the election results will affect the rate of consumer borrowing. However, he did look into 2017 and beyond by noting that, ‘If over the next few years the economy expands, unfortunately mortgage defaults will increase a little bit.’
‘I don’t know if this is a sign of something to come or just a hint but there are a lot of factors out there that suggest that they are more likely to go up than down,’ he adds. ‘But I don’t see another financial crisis around the corner.'”