Are you worried about a potential housing market crash? In this episode of the Creating Wealth Simplified podcast, Chris Seveney dives into a recent New York Fed Report to uncover what the data tells us. He explains why credit card debt is on the rise, even though overall delinquency rates are low, and what it means for the housing market in the future. We’ll also uncover when mortgage defaults might surge, critical intel for real estate investors. Plus, get ready to explore the unexpected rise in bankruptcies compared to foreclosures – what does this mean for the future? Chris also reveals why they believe a wave of opportunities could be on the horizon for note investors. Join Chris Seveney today because there is so much to unwrap in this episode that you don’t want to miss!

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The New York Fed Report Analysis: Is The Housing Market Headed For A Downturn?

Total Balance Of Delinquencies

I am going to talk about the report by the New York Fed that came out along with some information from the Consumer Credit Panel and Equifax. I want to talk about the report and what that means for those investing in the note investing space or real estate. The first chart I’m going to dive right into is an overall total balance of delinquencies within the US markets. This does include more than mortgages, credit cards, car loans, and everything.

When we look at this chart, let’s now take out 2007 to 2013 essentially, which was the Great Recession. I am a believer that we will not get or have a recession equivalent to that. There were a lot of safeguards put in place. Hopefully, that protects us from that type of downturn, but that doesn’t mean that there’s the potential for a recession. If we look at where things are in the economy, from a jobs perspective and an affordability perspective, I am a believer that things are probably going to get a little more challenging over the next few years before they get better.

 

I do have to use the caveat that I’m not an investment advisor, I’m not providing financial advice. I’m just a dude providing my opinion. When we look at the total balance by delinquency status, this goes back many years. When we look at where we are now compared to historical, we’ll see that severely delinquent, which is dark. It’s floating around about 1% and overall delinquencies are floating a little bit above 3%.

If we were to average out where that number is typically at, we are probably about 30% or 40% below the norms. Overall delinquencies, compared to historical, are below the median, and it has been over the years. The question is, are we going to stay below the medium or do we think that we will head back up towards that norm? I wanted to share this first chart as the intro to where things are overall. If we head to the percent of balances of loans that are 90 days past the delinquent, the first thing I’ll put on is student loan debt. It has been paused. You’ll see that has gone from over 10% defaults down to 0%. That’s going to be interesting to see how that does play out because if that does kick back in, there’s a lot of people with a lot of student loan debt. When you factor in the cost of housing and the cost of rent and where salaries have been, I’m a believer that salaries have not kept up with what it costs to live in for housing and where inflation is at.

Granted, I hear reports of inflation is down 2% to 3%, but then I go to a grocery store. I go shopping. It seems like stuff is still expensive and getting more expensive. I only look at the data that’s being provided. What is interesting about this is you’ll see credit card debt is up to about 11% of 90 days past due. Over the years, that average has probably been about 7%. Credit card debt has spiked to essentially getting the equivalent of where we’re at in 2008.

For me, that would be some cause for concern. Auto loans that are on this pretty much have always been in line with a little bit below 5%. That’s been pretty much consistent. The mortgage balances have historically been 2% to 3% and that is still at all-time lows. What is going to be interesting, and this is where I’m going to put on my mortgage note investing hat. During COVID, we had such a huge ramp-up and increase in property values and easy money. There were a lot of people refinancing and getting revolving lines of credit.

We’ve seen loans, where people were getting those lines of credit, maxing them out to pay off their credit cards only to a year later, be in that credit card default. The question posed on this chart is mortgage debt and defaults going to stay at historical lows or is that going to come back up to the norm? With everything else, if you look at this chart, starting to rise. Again, a credit card is probably the scariest where that’s going especially with rates probably in the 20%-plus. It is something to watch for. It’s something to consider. Thankfully, people with their homes have equity that they can use to sell their homes but that still doesn’t mean that they might not go into default. For those reading, what are your thoughts?

Transition Into Delingency

As we move on to the next chart, this is an interesting chart as well. It’s a transition into delinquency, meaning what percentage of loans are starting to move from being current into being delinquent? Let’s take out student loans from the start because essentially, it’s zero. What we’re starting to see is every type of loan is starting to increase but it’s also starting to increase pretty rapidly. Credit card debt in 2022 probably be around 4% up to 9%. Auto loans were around 5%. That’s up to 8%. Mortgages were under 2% and that’s floating up to over 3.5%.

We’re starting to see that increase in defaults but what does that mean? To me, a lot of people are still very bullish on real estate, thinking that if interest rates go down, prices will start to increase. The economy is doing well and the price of real estate goes up forever. Unfortunately, that’s not the case. Real estate is not linear. No market is linear, meaning it consistently increases over a period of time. It goes up, down, and goes back to a norm, historically.

Now, the markets have been hot. I’m starting to see potentially some ups and downs there in real estate. I read a report in Jacksonville about how Jacksonville is having a significant increase of houses on the market and an investor there is getting very nervous. As we look into this transition into delinquency, the mortgage numbers have typically been around, again taking out 2007 to 2012, around 5%. We’re a little bit over 3.5%. We get back to the norm. What does that mean for note investors?

We continue to see the product. Not a ton of product but we’re starting to see a little bit more coming on the market. Based on this data, we’re going to continue more loans in the market. As we move to the next slide, which last slide was a transition into serious delinquencies of 30 plus days. Now we’re going to talk about loans that are 90 plus days. For people reading, again, we’ll have all these charts online to download.

As we look at the transition to 90, we have the student loans again to throw those out. Interestingly enough, this chart doesn’t show a significant uptick as we did on the 30-day. Again, credit card buoyancy rates are just starting to skyrocket and start to move. Also, starting to see it on auto loans which is probably not unexpected because ours were selling for an extremely significant amount of money and at high interest. People with those payments are realizing, “I can’t afford it.”

Credit card delinquency rates are starting to skyrocket. Share on X

For me, when I put on my thinking cap, I look at real estate usually takes a lot longer than others because its illiquidity starts showing signs. If you look at auto loans and look at what’s happening there, ours were overpriced. People probably have a little regret in buying. People now have probably over-leveraged. They’re starting to run into a little bit more trouble. They’re probably back at the average or a little above where that average is.

I’m suspecting in the next 24 months, we’re probably going to see some similar data on the mortgage side of space as well. We’re going to start to see people get into more delinquencies on these loans. As we look at another chart of transition rates for current mortgage accounts and this is, again, mortgages that go from 30 to 60 days late and those that go to 90 days late. It surprised me a little bit, the 30 to 60.

Again, pretty much at all-time lows. It was at all-time lows during COVID. It continues to remain there at three-quarters of 0.8%. Historically, you’re probably at about 1.25. Still, when you look at those numbers, almost 50% below the historic norm, even though they’re small numbers. The 90-day late, transition rate has pretty much always been very consistent over the last twenty years besides the great financial crisis.

This looks like one of the little art monitors that has very little flubs to it. I did find that interesting to see where that is. To me, honestly, not a lot of data to pull from this, but with the expectation of those 30 to 60-day numbers where people are starting to get behind is going to continue to increase. This next one, I thought was also interesting, which we talk about now, the quarterly transition rates for 30 to 60 days late on mortgage accounts.

Loans that are behind that go current are doing very well. People are catching back up. Historically, that number is probably around 35% to 40%. We’re at about 50% of the loans that are delinquent and transitioning back to being current. The question is that I pose to people, are they getting back to current because they’re making the payment or are they getting back to current because the servicer is pushing those payments on the back end and bringing the loan current?

That’s an interesting part of this statistic. You notice in 2020, you saw that number jump to 60%, and it starts to spike a little bit down more. I believe a lot of it is because loans are being brought current and not people making that payment. This is an interesting thing to watch as we continue to move forward. How are the banks reacting to these loans, especially these lower-interest loans that go behind and get current because it will be interesting how they look at it on their books.

If there’s a continuation of borrowers constantly getting behind and an economy where unemployment’s near all-time lows and could increase. The bank’s going to continue to work with the borrowers or they’re going to push them into the 90-plus days late, which is floating a little bit above 10%. Historically, probably around 15%. Again, those transition rates did shoot up after COVID, but it’d be interesting to see where this transition is. Not only looking at the data but why are these numbers the way they are. Is it because people are coming up with those payments again, or is it individuals having their loans deferred?

 

Consumers With New Foreclosures And Bankruptcies

The last chart is the number of consumers with new foreclosures and bankruptcies. In this one, I want to spend a few minutes with and talk about because this is probably for investors one of the most relevant talking points. There are a lot of people who are interested in note investing and want to get into the space. When they think of non-performing, some people want to get into space to foreclose, take the property, get it into discount, fix it up, rent it, sell it, and seller-finance it. Whatever your preference is.

If I were to guess, and I’m just pulling a number out of my head, the last ten loans that we were trying to work something out with the borrower, but were unsuccessful. I don’t believe one of them foreclosed. It’s owner-occupied. Every single one went into bankruptcy. We’re seeing a significant increase in bankruptcies over foreclosures, which you can see on this chart, where bankruptcies were always significantly higher than the number of foreclosures from 2020 to 2022, huge spread, but it’s always been about twice as many bankruptcies as foreclosures if I were to guess looking on this chart.

Except for 2008 to 2012 where people were okay with the foreclosure because they were so underwater and did not want to keep their house. What this again shows and when we look at our business model is we want to try and work things out with the borrower because they want to stay in their home. People wouldn’t be filing bankruptcy if they didn’t want to stay in their home, versus foreclosure.

We’ve seen over the last three years that this number would be pretty consistent between foreclosures and bankruptcies for those looking at the chart. Again, we go back and look at these historic norms. We are probably from 2014 to 2018, an average of 275,000 bankruptcies and 100,000 foreclosures. We’re at half those numbers now. I’ll let that sink in for a second. As note investors, I know a lot of times, people again talk about the lack of inventory and lack of defaults. Do we think that the norm from where we were in 2018, 2019, and 2020, which then dropped down significantly because of government intervention, and now that government intervention isn’t around, it’s going to stay at all-time lows?

What do we think it’s going to revert back to? If you’re asking me, we’re going to revert back to the mean. If we revert back to the mean, that means we will see a significant increase in defaults, borrowers filing bankruptcy, and more foreclosure filings, which gives people more opportunities within the note investing space. I wanted to share this information with people.

If people are interested in more information or the full report, feel free to reach out to us. We will happily share that email with you. It is the New York Fed Consumer Credit Panel report. It’s something that is easily downloadable. This is all information that is publicly available. I hope you enjoyed this episode. As always, make sure to leave us a review and follow us. If you’re interested in more information about our offering or learning more about notes, please feel free to reach out to us. Thank you all. Have a wonderful day.

 

Important Links

• New York Fed
• https://7einvestments.com/invest/
• https://www.LinkedIn.com/in/christopherseveney/