Is It A Sign?

Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.

As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...

From Dennis Fassett, Cash Flow Mercenary...

I read a headline that caught my attention: "Mortgage delinquency rate surges to 10-month high.”

I’ve read about, and written about here, that the market is expecting a phase 2 to the mortgage crisis that we just came through. It’s not supposed to be as bad as the first one, but from what I’ve read, it could be substantial.

I know several investors who believe the reports and are getting prepared for it.

So my question is, is this a sign that it’s coming just over the horizon?

The article stated that the national delinquency rate quickly came off its 7-year low, reversing a trend that it had been on for many months, and instead surged to the highest level in 10 months.

It went on to say that the nation’s delinquency rate, which is defined as anything 30 or more days delinquent, but not yet in foreclosure, jumped 12% from October, which brought it well above 6% for the first time since February 2014.

The interesting thing is that, while delinquencies have increased in 6 of the past 7 Novembers, there hasn’t been an increase anywhere near this magnitude since 2008.

Foreclosure Inventory Is Going the Other Way – For Now

On the flip side though, the national foreclosure inventory continued on its trend of decline, and it reached its lowest level since January 2008. Foreclosure starts are also way down, and decreased 9% month-over-month, which is the lowest level since May 2006.

But foreclosure starts are a lagging indicator, so we shouldn’t expect to see those start increasing until the delinquency duration gets into foreclosure territory.

So it’s something to watch.

I read another article that could be a fly in the ointment of the housing market, and that could exacerbate this delinquency problem.

And that’s an increase in mortgage interest rates.

Bankrate.com put it this way with respect to interest rates: "the handwriting is on the wall.”

Meaning that interest rates have to go up at some point. And it’s looking like it will be sooner than later.

The last time the Fed raised the federal funds rate was in 2006. Since then, the rate plummeted to a target range of 0 to 0.25%, where it’s been static for the past six years. Similarly, the prime rate, used as a benchmark for a variety of consumer loans, has been stuck at 3.25%.

More Darn FED Meetings

After the Fed’s 2-day December meeting earlier this month, they “clarified” their plans saying it is likely to hold rates near 0 at least through the first quarter.

Based on their meeting, the outlook suggests that we’ll see at least a couple of quarter-point rate hikes in 2015.

Those increases would most directly affect rates charged on variable-rate credit cards — almost all credit cards these days have variable, not fixed, rates — home equity loans, adjustable-rate mortgages and student and auto loans.

Fixed-rate mortgages, which were averaging 3.99% on a 30-year loan recently, should head higher even earlier, and we’re likely see them begin to move up as the timetable for Fed action gets more clear.

So – more grist for the mill.

Increasing delinquencies are here and higher interest rates look they’re right around the corner.

Two factors that will absolutely impact real estate investing.

What’s your plan to monetize the scenario if it plays out?