Mortgage

Mortgage borrowers will be just fine when the economy slows

Capital Economics says lenders can expect a nominal rise in delinquencies

An economic slowdown has been widely forecasted, and this brings into question its inevitable impact on the housing market.

But while a slowing economy typically causes a rise in mortgage delinquencies, Capital Economics predicts the impact will be minimal.

In the next several months, home-price growth will continue to slow, with Capital Economics predicting it to grow by just 2% in 2019 and remain unchanged in 2020.

But because of the market’s tight supply, values will remain strong, and this will incentivize homeowners to keep up with their mortgages.

Further, while the slowdown will also affect the employment rate – with Capital Economics predicting it will rise from 3.6% to 4.7% in 2020 – this will not cause delinquencies to spike thanks to stricter lending standards, “which mean borrowers today are better placed to manage a short-term loss of income.”

All things considered, the economists predict delinquencies will rise marginally, increasing from its current 4.4% rate to around 4.8% by the end of 2020.

That said, the report warns that if the slowdown turns out to be much more severe than expected, the cities hit the hardest will likely be San Francisco, Seattle, Denver and Las Vegas.

But a lot has changed since the Great Recession, and with stricter lending practices in play, borrowers are better equipped to handle financial shocks, and this, the economists say, will incentivize lenders to offer forbearance to those who do fall behind.

This will keep the foreclosure start rate low, with a predicted rise from 0.25% to around 0.30% over the next couple of years.

“The risk of a downward spiral from higher foreclosures leading to more delinquencies, as seen in the late 2000s, is therefore low,” the economists state.

 

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