DC’s Drop in Mortgage Problems Signals Stability

The rest of the country has seen steady declines in mortgage defaults, delinquencies, and foreclosures since the subprime mortgage crisis. However, DC has been (as with everything) a different story. Fortunately, a drop in subprime delinquencies since last year could signal a more stable market.

Since the second quarter (Q2) of 2014, subprime mortgage delinquencies were halved, according to the Federal Reserve Bank of Richmond. The Bank’s November 2015 Snapshot of the US’s Fifth Reserve District (which includes the DC Metro Area) details some of the trends and reasons.

DC has indeed had a different story to tell than most areas of the country in terms of mortgage defaults, delinquencies, and foreclosures. The rest of the nation’s mortgage delinquency rates (a good indicator for foreclosure rates), skyrocketed along with the subprime mortgage/financial crisis beginning in 2008.

Total US delinquencies peaked above 5% in Q2 of 2009. Since then, it has steadily and consistently declined to less than 2% today—per the graphic here from the Bank.

Thanks to the Federal Reserve Bank of Richmond

Thanks to the Federal Reserve Bank of Richmond

In the District, on the other hand, mortgage delinquencies never reached 4% in 2009. But instead of declining, they more or less stayed steady around 4% from then through to last year. That means that homeowners in the District (not to be confused with the DC Metro Area) were under particular economic strain during a much longer stretch than most of the nation.

The peak wasn’t reached because of the obvious reason. In a town where 31% of metro area residents work for a government entity, income is rather steady. That said, it doesn’t explain why the delinquency rates didn’t drop off after the crisis.

Rather, the long-lasting period of strain is likely due to the massive gentrification in DC. As newer (wealthier) residents move in and increase demand for the inflexible housing supply, this flurry of activity pushes prices upward. Long-time residents are strained to make mortgage payments in the face of the skyrocketing property taxes linked to those prices.

In fact, according to the Bank’s statistics, subprime mortgage delinquencies in the District stood at 12% as of the middle of last year—four years after the rest of the country peaked. The District’s unemployment rate stayed above the national average since 2010. Accordingly, the non-business (i.e. personal) bankruptcy rate plateaued at a significantly higher rate than most the country. While the vast majority of the country has recovered from the financial crisis, DC’s homeowners were seemingly stuck in a loop of insolvency.

However, this year seems to tell a different tale. The non-business bankruptcy rates fell by some 20% since last year. Subprime mortgage delinquencies have made the largest rebound, halved from last year’s 12% to just over 6%. Total mortgage delinquency rates in the District proper also dropped below the national rates for the first time since the crisis to 1.44%.

Corroborating this are unemployment rates, which dropped more than a percentage point to 6.7%—much closer to the national average of 5.1%. Again, much of this is probably explained by the influx of higher-paid stable federal employees from the rest of the DC Metro Area.

More importantly are the stabilizing tendencies. Home prices in DC have been increasing at rates above the national rates—again, just as all of us yuppies move into the city. But this year has finally seen that trend start to calm. The District’s home price index, which is a way to measure price increases compared to a baseline year, has gone up more than twice as much as the nationwide index.

That said, there are still regional differences in those numbers. As Consulting firm Corelogic shows in the graphic below, the Eastern counties surrounding DC and the Eastern half of the District itself still see frequent foreclosures.

Thanks to real estate consulting firm Corelogic.

Thanks to real estate consulting firm Corelogic.

However, the decrease in delinquencies indicates a general calming of the market—an equilibrium of sorts. Without prices shooting up beyond people’s expectations to pay off mortgages when they first buy in a neighborhood, delinquencies and defaults slow.

To corroborate that change, many forecasts show plateauing home prices—as we reported on in a recent post here in Urban Scrawl. Some forecasts still expect rising prices. However, even these more optimistic expectations are in line with national home price increases (as opposed to the ridiculous double digit year-over-year increases we’ve seen recently). Corelogic, for example, expects home price increases despite an overvalued (or overheated) real estate market.

Either way you look at it, this is a positive change for Washington, DC. It tells the story that the disruption of gentrification may be slowing (if only temporarily) and that the real estate market in town may adopting just a bit more of an even keel.

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