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Mortgage Delinquencies Decline, Helping Job Gains

Correlation is High

By Louis Rosenthal | Wednesday, September 7, 2016

The outstanding balance on mortgages that were 30 or more days past due was $73.89 billion in the second quarter of 2016, according to the New York Federal Reserve Bank's Consumer Credit Panel report, essentially unchanged from the first quarter. These represent the lowest mortgage delinquency balances since the second quarter of 2003, which has a tight correlation to positive job gains.

Looking closely at the chart above, we can detect an interesting story about the nature of the housing bust and the Great Recession. The mortgage delinquency balance really began its upward trek in the first quarter of 2005; however, the unemployment rate does not begin to increase significantly until late 2007 and early 2008.

This suggests the existence of a housing bubble that, once it popped, had major consequences for the labor market. In other words, it’s the delay between the growth in mortgage delinquencies and the unemployment rate that point toward the unique circumstances of the Great Recession. Yet, once the peak of the crisis passed, we began to see a very tight relationship between the unemployment rate and the mortgage delinquency balance: As the unemployment rate falls, so too does the balance of outstanding delinquent mortgages.

To further illustrate the relationship between mortgage delinquencies and the unemployment rate, consider the above scatterplot, which uses a slightly different measure of mortgage delinquency from TransUnion: the percentage of mortgages in each state that are 60 or more days delinquent. The message in this chart should be clear: States with a higher percentage of seriously delinquent mortgages tend to have the highest unemployment rates.

According to David Crowe at the National Association of Home Builders (from a post in 2012), there is an intuitive reason for the tight connection between mortgage delinquency and the unemployment rate. When the economy is operating at full capacity, a homeowner might be unemployed and without income for a period of time. Without an income stream and the ability to pay the mortgage, homeowners can sell their home and move into a smaller, cheaper home or into an apartment. In so doing, they pocket the balance of equity in their home and work toward finding employment and rebuilding lost income.

However, when the economy is in a downturn and layoffs mount, homeowners find themselves in the unenviable position of being forced to sell their home just as home prices collapse. But when the economy begins to recover and home prices begin to rise, homeowners who have kept their properties can either sell their home for significantly more than they would have during the downturn, or they may find themselves employed again and able to afford the mortgage payments.

Looking forward, Axiometrics expects to see further declines in the mortgage delinquency balance as job gains continue to brighten through the remainder of the economic recovery. In turn, this should spur higher demand for goods and services as homeowners find themselves with higher incomes and a greater ability to pay down their outstanding mortgage debt.

But the current recovery, now at 85 months, will end sometime. On the bright side, any economic downturn would likely be a product of the normal business cycle as opposed to a housing-bubble-turned-financial-crisis. In that sense, the sorts of spikes in unemployment and mortgage delinquency balance that typified the Great Recession and the Great Recovery will probably not occur.

Louis Rosenthal

Louis Rosenthal

Real Estate Analyst

Louis Rosenthal researches and analyzes current apartment trends in the United States and correlates them with economic indicators. He also studies the urban landscape and other metrics to develop in-depth reports and presentations for clients. Louis recently earned his Master of Science in Public Policy, focusing on housing, landuse patterns, real-estate dynamics and economic development. He combines that knowledge with his four years of practical experience in tax analysis, regression analysis and presentations to develop insightful analysis. An accomplished writer, Louis’ work has appeared on and Axiometrics’ blogs, among others.

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