Executive Summary
Last week’s missive discussed the affordability of housing. Look at the first graph, one can see it requires a $115,000 household income to afford a median priced home. During the pandemic, the CARES Act provided relief to those struggling to pay their mortgage. Now with the low unemployment rate, one would expect low and falling delinquency rates on mortgages. However, as shared below, both renters and owners behind on monthly payments are on the rise. Close to 10.8 million households are now behind. According to Melody Wright, a real estate expert, “foreclosure starts” are up to 22.6% from 20.4% in the prior year. Time will tell if the government steps in again, or if foreclosures continue to increase.
Please proceed to read The Details below for more information.
“Home life ceases to be free and beautiful as soon as it is founded on borrowing and debt.”
–Henrik Ibsen
The Details
Following up on last week’s missive regarding the price and affordability of housing, in this newsletter I will highlight some statistics on the state of households’ ability to pay their existing mortgages or rent. During the pandemic, the CARES Act provided some breathing room for mortgagors struggling to pay their loans due to business stoppages, slowdowns and layoffs. Under the Act, homeowners were able to defer payments on their mortgages without fear they would lose their homes through foreclosure. Lenders often extended the time period allowed, even beyond that required by the Act, and sometimes worked to modify the terms of the mortgages. However, it is important to note that the deferral was not a forgiveness of the loan, and any missed payments accumulated with interest. This unpaid amount was either amortized over the remaining mortgage term or added to the back end of the mortgage.
The current low unemployment rate is deceiving, in that one would expect low and falling delinquency rates on mortgages. In fact, the added cost of deferred loans combined with a significant jump in the cost of living has created problems for many households struggling to make ends meet. Also, the jump in mortgage rates, and skyrocketing of home prices in 2021 and 2022, led some to bite-off more than they could chew. This was detailed in last week’s newsletter. Look at the chart below from RedFin showing homebuyers need to make $115,000 just to purchase a median priced home.

While the overall delinquency rates still pale in comparison to the Financial Crisis, the rate of increase in delinquent payments foretells trouble ahead. The following data is from the U.S. Department of Housing and Urban Development’s Housing Market Indicators – Monthly Update, December 2024. In this analysis I will look at households including renters and mortgagors. According to the report, 12.8%, or about 5.9 million rental households are behind on their rent payments. This is up from 12.1%, or an increase of about 330,000 households from last year.
About 5.9%, or 4.9 million households are behind on their mortgage payments. This is up from 5.2% in the prior year, or an increase of around 580,000 households. Combined with renters, there are close to 10.8 million households behind on their home payments.
FHA (Federal Housing Administration) and VA (U.S. Department of Veteran’s Affairs) loans comprise over 25% of total mortgage loans. Delinquent FHA loans jumped from 11% last year to 12.6% currently. The delinquency rate on VA loans is about 4.6% up from 3.8% last year. According to real estate expert, Melody Wright, the FHA foreclosure starts are at 22.6%, up from 20.4% in the prior year.
The bottom line is that inflation and higher interest rates are forcing many homeowners into delinquency. The number of households behind on their home payments, both renters and mortgagors, is pushing 11 million and rising. Any increase in the unemployment rate will accelerate these delinquencies. At the same time, the purchase of a home has suddenly become unaffordable for many households. Even renting is a struggle for many.
Will the Federal Government come to the rescue again, piling more deferrals on top of mortgage balances, or will they allow foreclosures to rise? Over the course of the next year an answer might become evident.
The S&P 500 Index closed at 5,997, up 2.9% for the week. The yield on the 10-year Treasury Note fell to 4.61%. Oil prices increased to $78 per barrel, and the national average price of gasoline according to AAA rose to $3.12 per gallon.
© 2024. This material was prepared by Bob Cremerius, CPA/PFS, of Prudent Financial, and does not necessarily represent the views of other presenting parties, nor their affiliates. This information should not be construed as investment, tax or legal advice. Past performance is not indicative of future performance. An index is unmanaged and one cannot invest directly in an index. Actual results, performance or achievements may differ materially from those expressed or implied. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy.
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