Do Delinquency Rates Indicate 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 can provide a snapshot view of how things are performing.

There are numerous factors that can be looked at within the housing market to be used as indicators, such as house costs and the number of new homes 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. Clearly an increased number of foreclosures are an indication that individuals’ finances are not healthy and would suggest that all isn't well. Foreclosures themselves have a negative impact on the housing market by reducing the homes value and the value of the other houses 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 because they cannot 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 may also indicate the lenders have not been acting responsibly in providing their loans and have been offering loans to people who are regarded a high risk. In fact 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 entire market began to collapse. Not only did high delinquency rates indicate a recession in this instance, but in fact they caused one.

It is not always the case that a country ought to panic if delinquency rates become high, however, since it does not always portray a completely accurate picture. Typically, when a lender sees that a mortgage is turning bad and the debtor is incapable to satisfy 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 because they have not been wiped out by foreclosures? Well, it is thought that currently a lot of the loans that are delinquent haven't been foreclosed yet since the bank is looking for alternatives such as 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 could simply mean that the figures are somewhat exaggerated and it is just a case of the delinquencies not being processed yet, which means that they are still within the system while 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's necessary to look deeper into the data before drawing a conclusion.
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