The Mortgage Banker’s Association reported that the seasonally adjusted delinquency rate for mortgage loans on one-to-four-unit residential properties fell to 7.99% in the third quarter of 2011, the lowest level recorded since the fourth quarter of 2008. While any decrease is good news, don’t get too excited just yet– it’s a decrease of just 45 basis points.
The delinquency rate is an important one to follow because it’s one of the best leading indicators we have for predicting ‘shadow inventory.’ Shadow inventory is the elusive backlog of future foreclosures–that is, homeowners who are inevitably headed towards foreclosure but the paperwork is still going through so the bank has yet to take possession of the house and/or list it for sale. Foreclosure processes vary widely state to state, and it’s notoriously difficult to predict when a property will actually hit the market. Buyers and market bears are always shouting about the huge backlog of inventory coming down the road, dooming recovery progress in the shaky housing markets. Yet here in the DC area we have been waiting years for this alleged ‘tidal wave.’
I wouldn’t hold your breath. First, these delinquency stats have been relatively stable for years, and we haven’t seen the big bump in foreclosures yet in our area–the fact is that our local market (particularly close in Northern Virginia and DC) has remained strong enough to absorb foreclosures and short sales as they come to market. Second, remember that banks control the inventory they take possession of, and they are well aware of the laws of supply and demand. If a bank is trying to recoup as much value as possible, why would they flood the market with inventory, thereby depressing prices? The carrying cost of a property for a bank is minimal–after all, they don’t pay themselves a mortgage–so the only real incentive for them to get properties off the books is regulatory requirements that affect the amount they have to hold in reserves. So it’s a big of a juggling act for banks.
Delinquencies, of course, are tied to unemployment rates: no job = can’t pay the mortgage = delinquency. DC’s strong job market is another reason we don’t see the avalanche here that other parts of the country might experience. But stay tuned…the lack of a budget deal from the super committee could mean serious cuts in government spending in our local market.