Rising home prices are one sign of an economic recovery. But in the aftermath of the last recession, they are about something more: the renewed ability of borrowers to make their mortgage payments and avoid delinquency.
When the economy first collapsed, many homeowners found themselves in the unenviable position of owing more on their mortgages than their home was worth—the result of a massive decline in housing prices that served to rebalance an overvalued market. This was highly problematic, because people who could not afford to repay their loans also found it difficult to refinance or sell their homes. Due to the low property values, they would still remain in debt.
That is changing, however. A recent article on HousingWire noted that improvements in regional housing prices are strongly correlated with improved repayment rates. The news source cited a report from Fitch Ratings.
"Borrowers with more equity can more easily sell the property if under duress or refinance to lower their monthly payment," the ratings agency reported. "It is therefore not surprising that when home prices rise, borrower performance improves due to lower loan-to-value (LTV) ratios."
The report added, however, that recent home price increases are not expected to continue at their current pace for long. In other words, lenders cannot entirely count on this factor to prevent borrowers from becoming delinquent on their loans. Banks and other lenders still need to make a profit, and they must use risk assessment tools to carefully consider which borrowers stand the best chance of making their payments in a timely fashion.