A new study from MAISY.com predicts household inflation will more than double seriously delinquent mortgages by the end of 2023 to 580,000, a level not seen since 2016. Mortgages that are 90+ days or more in arears are considered “seriously delinquent” and usually trigger lender foreclosures.
2023 will be the year that households exhaust Covid income payments and increasingly rely on credit cards and consumer loans to maintain living standards in the face of 40-year high inflation. Unfortunately, 580,000 households will no longer be financially able to make timely mortgage payments with 90+ day delinquencies jumping from 257,000 in 2022 to 580,000 in 2023 as shown in the chart. This level of delinquencies will impact more than 1.6 million household members.
Reductions in 90+ days delinquencies from 2016 to 2019 reflected a booming economy with a real income (adjusted for inflation) increase of 7.8% and a reduction in unemployment from 4.7 to 4.0%.
Federal government COVID income policies generated $2.3 trillion in household income supplements in 2020 and 2021 (NY Federal Reserve) which along with forbearance and foreclosure moratoriums generated the historic decline in serious mortgage delinquencies shown in the chart through 2022.)
Declining Covid Income Buffers and Deteriorating Household Finances
Household savings rates ballooned because of COVID income supplements in 2020 and 2021. The chart below shows personal savings rates at 8.8% prior to COVID, surpassing 25% in early 2022 and falling to pre-COVID levels at the end of 2021. Since then, savings rates have continued to fall to a November 2022 rate of 2.4%. Rates below the 2019 level reflect a “dis-savings” as households draw down savings.
Industry experts including Moody’s Analytics and JP Morgan Chase agree that Covid-related household income benefits will have been exhausted anywhere from the end of 2022 to the middle of 2023.
As excess savings are depleted, households are increasingly using credit cards and consumer loans to maintain pre-Covid lifestyles. Households will begin facing the unpleasant reality by mid-2023 that they are back in a pre-COVID financial position that has deteriorated because inflated costs of living have significantly outstripped wage gains.
This grim reality is reflected in nearly every measure of household financial health. October 2022 credit card balances are up $16 trillion or 21% from their low in Q1, 2021. PYMNTS November survey finds 63% of consumers living paycheck to paycheck with the majority blaming inflation for their situation. For consumers earning more than $100,000 the figure is 47%. Vanguard reports 401K emergency financial hardship withdrawals are now the largest since 2004.
Deteriorating household finances are evident in data on household utility and loan payment arrears. The National Energy Assistance Directors Association reported in November that about one out of six American families are behind in their energy bills with an average arrears of $788. Credit card, automobile, home equity and other consumer loan arrears are steadily increasing by the month. Extrapolating these series beyond 2022:Q3 shown in the chart below indicates that households will be in worse financial shape at the end of 2023 than before Covid began.
Data on Increases in “Seriously Delinquent” Mortgages
Information from the NY Fed on new 90+ days delinquencies in the chart below shows the expected uptick in new seriously delinquent mortgage balances. This trend is evident in other data sources such as Black Knight, a mortgage industry intelligence firm, reporting in December 2022 that their “First Look at mortgage performance in November isn’t pretty, with signs that a growing number of homeowners are struggling with their mortgage payments.” Black Knight also reported an 11 percent increase in 60-day delinquencies and a 19% increase in foreclosure starts.
Forecast: 2023 Seriously Delinquent Mortgage Estimates
2023 seriously delinquent mortgages are estimated in this study using an econometric model based on mortgage delinquency data across 466 US counties provided by the US Consumer Financial Protection Bureau (CFPB). Additional information on data sources and a more detailed description of the modeling methodology are provided in a later section in this paper. CFPB data reflect counties with the largest number of mortgages reflecting approximately 75% of the first mortgage market.
The forecasting model statistically relates the percent of 90+ day county mortgage delinquencies in 2019 to variations in county income and other socioeconomic variables. Net income loss (household inflation minus household wage increases) from 2019 to 2023 is calculated and applied with estimated model parameters to forecast the increase in county-level delinquencies likely to result from inflation impacts, net of wage increases.
The average US household mortgagor net income loss is $16,442, - about 13% of average mortgagor 2023 household income or 1-1/2 month’s annual income. That is, even after accounting for wage/income increases, average mortgagor households will have lost the equivalent of 1-1/2 month’s income from 2019 to the end of 2023.
US seriously delinquent mortgages are predicted to jump from 0.5% at the end of 2022 to an estimated 1.13% by the end of 2023 resulting in 580,000 delinquent mortgages as shown in the first chart in this paper.
To read the full report, including more data, charts and methodology, click here.