The next threats to the US real estate market recovery apparently are “prime borrowers:” those with good credit. Image credit: bahia0019
Currently, prime borrowers are defaulting on their mortgages at significantly higher rates than years prior. Consider that in 2006, the delinquency rate for loans under $417,000 was 1.38% compared to 2.44%. Although the absolute numbers may still be low, the increase represents almost double to risk for lenders and hundred of millions of dollars for the lenders.
Moreover, prime loans issued last year have nearly triple the default rate of those issued prior to 2007. Note that WaMu (Washington Mutual) and JP Morgan Chase are already reporting high delinquency rates for this year as well.
The Relationship Between Home Prices and Defaults Perhaps more troubling is that there is a strong correlation between home prices and defaults. As prices continue to decline, there are more defaults, prompting prices to decline further.
A recent poll suggested that around 60% of the loan officers had tightened lending standards for prime mortgages during the first quarter of 2008. Additionally, loans are becoming more expensive in some cases.
As more restricted credit becomes the norm, the housing market recovery will likely be prolonged. Eventually, many qualified borrowers and real estate investors are banking that prices will decline even further as the house inventory continues to increase, which appears to be a safe bet for now.