The housing market is experiencing a crisis unlike anything seen in the past decade. Bravos Research has highlighted the alarming rise in housing defaults, driven by the Federal Reserve’s unprecedented hiking cycle. Over the past 1.5 years, the Fed has raised rates from near 0% to 5.5%, significantly impacting the housing market due to its high rate sensitivity.
During this period, 30-year mortgage rates broke out of a key downtrend line, rising from 2.65% to around 8% in 2023. These elevated rates have made the housing market extremely unaffordable, with homebuyer affordability falling to the lowest levels in 35 years. Despite some fluctuations, affordability remains critically low.
Mortgage demand has plummeted as high borrowing costs have led to demand destruction. Rising unaffordability, coupled with high inflation, has put immense pressure on consumers, resulting in a rapid increase in defaults. The delinquency rate for multifamily housing has reached levels unseen in a decade, signaling deep distress in the market.
Even now, potential homebuyers are hesitant, with buying conditions collapsing to levels only seen twice since 1960—in 1974 and 1981. If a recession unfolds next year, it would pose another significant headwind for consumers and the housing sector.
The latest data reveals that the delinquency rate for multifamily housing has surged, with the prime sector 60- and 30-plus-day delinquencies rising marginally month over month to 0.58% and 1.89% in November 2024 from 0.56% and 1.86%, respectively. However, they decreased slightly year over year from 0.60% and 1.96%, respectively. Subprime sector 60-plus-day delinquencies also rose month over month to 6.01% in November 2024 from 5.87% in October 2024, and declined marginally year over year from 6.03% in November 2023. Subprime 30-plus-day delinquencies increased month over month to 15.91% in November 2024 from 15.79% in October 2024.
Home loan extensions have become the norm, leading to an increasing risk of double defaults. According to the latest data from S&P Global, the prime extension rate decreased month over month to 0.70% in November from 0.89% in October, but it rose substantially from 0.53% in November 2023. Of the 15 issuers with at least four months of data for both November 2023 and November 2024, 12 (80%) reported higher extensions year over year.
Systemic risks that trigger year-over-year extensions are due to consumers taking on more debt at higher interest rates and facing affordability issues. For instance, vehicle payments and other basic living expenses, such as auto and home insurance premiums, have risen significantly since before the COVID-19 pandemic.
This situation is likely to end badly. New cars are cheaper and better, even with guarantees. The question arises: why repo from dealers rather than transfer to other dealers? Is this just a sign of too much inventory on dealer lots and high short-term rates? The answer is yes, and floor plan defaults are surprisingly not widely discussed.
Sources:
https://x.com/bravosresearch/status/1879939253687451654
https://www.bankrate.com/real-estate/how-fed-interest-rate-affects-housing-market/
https://www.newsweek.com/these-housing-markets-hit-hardest-fed-rate-hike-1815568
https://www.federalreserve.gov/econres/feds/locked-in-rate-hikes-housing-markets-and-mobility.htm
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