Housing market data suggests the most optimistic buyers are likely to stop paying their mortgages during the pandemic

There was a period during the COVID-19 pandemic when confidence in future home price increases waned, even though actual home prices were still rising. Michaela Vacheva – Bloomberg – Getty Images

Traditional methods of predicting house prices and broader economic indicators are proving inadequate. Our recent research investigated an overlooked aspect of home buying: the importance of buyer expectations. We found that mortgage borrowers’ expectations about future home prices are critical to understanding the health of the economy.

There is a consensus that expectations for future home price and interest rate increases have a significant impact on housing market trends. The logic is simple. When individuals believe that their home’s value will increase, they are more likely to take on more debt. This effect is magnified in the housing market, where you can’t bet against a downturn, making the positive buyer outlook more influential. Previous research has shown that this optimism could prompt a rapid rise in house prices, creating a “bubble.” These bubbles often cause house prices to skyrocket due to speculation.

But what happens when expectations start to fall even as home prices remain high?

Our findings demonstrate that expectations are critical to mortgage borrowers’ decision-making processes. There was a period during the COVID-19 pandemic when confidence in future home price increases waned, even though actual home prices were still rising.

Borrowers who were initially most optimistic about rising prices were approximately 50% more likely to request forbearance (suspension or reduction of payments) than the broader mortgage borrowing population. observed (6% vs. 4% in the survey). ) during this episode. This highlights the significant impact that borrower expectations have on the housing market and economic stability.

expectations trump reality

We started our investigation with data from the Federal Housing Finance Agency, specifically the National Mortgage Database, and found something interesting. Before 2020, people who were positive about future home price increases were more likely to suspend mortgage payments during the early stages of COVID-19. Even though house prices were still rising -19 pandemic. This observation suggests that these borrowers are responding more to their expectations about the future than to actual market conditions at the time. When the outlook for home prices temporarily worsened, they chose to hold on. But as optimism returned toward the end of 2020 as the pandemic continued, those same borrowers began making mortgage payments again.

This pattern highlights how important expectations are in shaping borrower behavior, which has significant implications for the economy as a whole. After the survey period ended in 2022, expectations dropped significantly heading into 2023. Our findings suggest that a wave of optimistic borrowers from 2021 to mid-2022, coupled with negative equity and job losses, could make them particularly vulnerable to such declines in expectations. It suggests. Thankfully for the mortgage market, the economy and home prices have remained strong throughout this recent episode of lower expectations.

Our research serves as a warning to those involved in housing policy and finance. In addition to the usual financial metrics like interest rates, monthly payments, and how much debt you owe compared to your mortgage, it’s important to consider what the borrower thinks and expects. the value of their home.

It’s difficult to understand people’s expectations. Expectations are difficult to measure and introduce challenges known as adverse selection. This means that borrowers have more information about their ability to repay their loans than lenders or investors. The finding that something not typically tracked by mortgage investors, such as borrower expectations, can have a significant impact on whether a loan is paid as agreed is surprising and warrants more attention. There is.

For those regulating and monitoring the housing market, understanding the relationship between people’s expectations and what actually happens can lead to better forecasts and smarter policymaking.

Dr. Christos A. Makridis is an Associate Research Professor at Arizona State University, University of Nicosia, and Founder and CEO of Dynamic Banking.

Dr. William D. Larson is a senior fellow at the U.S. Treasury Department’s Bureau of Financial Research and an adjunct fellow at the George Washington University Center for Economic Research. The study was conducted while Larson was a senior economist at the Federal Housing Finance Agency (FHFA). The views expressed herein are those of the authors only and not of the U.S. Treasury, FHFA, or the U.S. Government.

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