Are Delinquency Rates An Indication Of A Recession Or A Recovery?

One among the most telling sectors that analysts and economists could look to when trying to determine forecasts for the economy is how the housing market is performing. Since the housing market is so closely linked with the personal welfare of the population of the country, it could offer a snapshot view of how things are performing.

There are a number of factors that can be looked at within the housing market to be used as indicators, like house prices and the number of new houses that are built. One among the more telling figures however is that of how many home loans are in delinquency. Delinquency is basically when a person has fallen behind on their loan repayments and might be seen as a precursor to foreclosure. Obviously a high number of foreclosures are a sign that individuals’ finances are not healthy and would suggest that all isn't well. Foreclosures themselves have a negative effect on the housing market by decreasing the value of homes and the value of the other homes around them.

So, are high delinquency rates an indicator of recession? Well it certainly isn’t a good sign. Typically, when a person falls behind on their mortgage repayments they do so since they can’t afford to make the payments. More often than not this would suggest that they have recently lost an income through losing a job.

High delinquencies might also indicate the lenders have not been acting responsibly in providing their loans and have been providing loans to people who are regarded a high risk. After all it was for this very reason that the recent economic crisis came about because loans that were granted to high risk people, referred to as subprime loans, left the lenders so exposed to toxic loans that when these loans started turning bad, the whole market began to disintegrate. In this instance not only did high delinquency rates indicate a recession, but in fact they caused one.

It's not always the case that a country ought to panic should delinquency rates be high, however, as it does not always portray a completely accurate picture. Typically, when a lender sees that a mortgage is turning bad and the debtor is unable to meet their commitments, they move in fairly quickly with the foreclosure procedure in order to cut their losses. Although foreclosure is clearly not a good thing, it does remove a delinquency from the records.

So what if the delinquencies are high since they have not been wiped out by foreclosures? Well, it's considered that currently many of the loans that are delinquent haven't been foreclosed yet since the bank is looking for choices like a short sale. Although with a short sale the bank is agreeing to take a hit, it is still preferable to a foreclosure. If this is the case then it might simply mean that the statistics are a bit exaggerated and it's just a case of the delinquencies not being processed yet, which means that they are still within the system whereas normally they'd have been removed.

So, although delinquency rates are quite a clear indicator of whether or not a country is looking at recession or recovery, at times it is necessary to look deeper into the statistics before drawing a conclusion.
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