By S.A. Ibrahim
Let me start of by saying that my goal is not to get readers to panic. Rather as a one-time credit risk guy, to raise questions that we should be asking in preparing for whatever unfolds in the near future.
We are in uncertain territory with the Coronavirus. The stock market has sold off sharply, the economy is being shuttered down, people are being laid off – who knows how long this will last and how bad it will get. While we can hope for the best, we have to be prepared to navigate through a rough patch of uncertain intensity and duration.
A Few Reflections from the Past:
- In my experience, the unemployment rate is a major driver of mortgage delinquency rates. Unemployment rate can also be a leading indicator.
- Home prices are a lesser driver (except in the case of speculators looking to flip real estate) but can translate delinquencies into foreclosures, if a borrower is underwater and cannot sell the home to pay off the mortgage. Home valuations and appraisals are mainly based on recent home sale (and listing) data that takes time to reflect the current market value and therefore are a lagging indicator.
- Friction and delays in the foreclosure and eviction process complicate the picture and drag out credit problems.
A Few Data Points:
- Using U.S. Bureau of Labor Statistics data, the seasonally adjusted civilian unemployment rate was around 4% in February 2000, hit a peak of 10% in February 2010, and most recently was around 3.5% in February 2020.
- Using Federal Reserve data, the residential mortgage delinquency rate was 1.79% at the end of 1999, peaked at 11.54% at the end of the first quarter of 2010 and was 1.52% the end of 2019.
- Using Case-Shiller data, the median home price to income ratio for Seattle Area was less that 4.5x in 2000, hit a peak of 7.0x in 2007 and is currently around 5.7x. Similar trends can be observed for The San Francisco Bay Area, D.C. Area, Austin,TX, just to name a few markets.
A Few Concerns About the Current Environment
- In a non-statistical, empirical set of conversations, buyers in high priced real estate markets have used the value of their appreciated stock portfolios along employer awarded shares and options or appreciated real estate holdings to buy homes.
- The Service sector accounts for 80% of US employment. While the health care and related category is the largest, hospitality and leisure services are equal. There is also a growing number of people employed in the Gig economy.
- According to Bankrate (June 2018), less than 30% of Americans have savings to cover 6 months or more in emergency expenses, while 45% have no cushion or less than 3 months.
A Few Positives
- Lower Interest Rates:
As rates decline, consumers and businesses have the opportunity to refinance their debt with lower going forward interest expenses. This is great! However, for those with reduced income and negatively impacted businesses, this may not be an opportunity. Credit standards remain tight.
- Government Assistance and Policy Actions:
While the rhetoric has been encouraging, I hope this does not turn out to be too little too late.
- Increased Demand in Some Sectors
Amazon, Walmart and many others have been hiring. There is greater demand for health care workers and home delivery services. Is this going to be enough and (a) are skills of those negatively impacted transferable, and (b) how much are money can people make compared to their previous jobs?
A Few Scenarios of How this could Play Out:
- Things turnaround super-fast and before you know it, this was a short bad dream and we are back where we were. In my opinion, such a scenario while desirable is pure wishful thinking.
- There is some impact but because of all the preparation, policy interventions and luck, we come out of this scarred but standing. I hope this is indeed the case and my motivation in raising these questions is that we make this happen through our preparation, and positive policy actions, at the individual, businesses and government levels.
- We suffer a serious downturn with unemployment hitting previous highs. This could happen; I hope it does not; but let us at least be ready as much as we can.
Hoping for the best for all of us and please be safe and remain healthy.
Mortgage Media Chairman S.A. Ibrahim is a seasoned executive with almost 40 years of leadership experience in the fintech sector. He was most recently the CEO of Radian Group. Read more about SA here.