Rising cost of insurance and property tax is the top risk for mortgage delinquencies: survey

The “hidden costs” of homeownership, including rising property taxes and homeowners insurance, are the biggest risk factors for rising mortgage delinquencies in the present market, according to a new survey.

The Auction.com survey of leaders in the default servicing space found that respondents assigned 37% out of a hypothetical 100 risk factor points to hidden costs, beating out any other factor.

Rising consumer debt delinquencies were not far behind with 32%, followed by rising unemployment at 15%, commercial mortgage defaults at 10%, and falling home prices at 6%.

The finding comes as insurance costs for homeowners skyrocket in many parts of the country. Nationally, they jumped 33.8% from 2018 through 2023, according to S&P Global Market Intelligence.

Some states have seen even sharper increases, with insurance rates jumping 60% in Texas over the five-year period. Colorado, Arizona, and Utah also saw increases of more than 50% over that period.

“A major reason is climate risk, and that insurers have had broad losses from severe climate events over the past few years from hurricanes and severe storms,” says Benjamin Collier, an associate professor of risk management and insurance at Temple University in Philadelphia. “If you look at places where insurers have been paying out more claims than taking in premiums over the last couple years, it’s half the states.”

Collier adds that inflation in construction costs has been another factor driving insurance premiums higher, by raising the cost for insurers to repair or replace a home. But he predicts that in the near term, higher insurance costs would have the biggest impact on mortgage delinquencies in areas that have suffered increased storms, floods, or wildfires in recent years.

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“My expectation is that these challenges would be greatest in higher-risk areas, because those higher-risk areas are where we’re seeing insurance prices climb the fastest,” says Collier. “I also think that this problem might be greater for lower-income households in those areas, who are often living and working much closer to the edge of their available budget.”

Meanwhile, soaring home values have also resulted in rising property tax burdens in some areas. The average tax on single-family homes in the U.S. rose 4.1% last year, to $4,062, following a 3% increase in 2022, according to ATTOM Data Solutions .

It all adds up to rising monthly costs for homeowners. A recent study from Bankrate found that the hidden costs of owning and maintaining a single-family home in the U.S. now average more than $18,000 each year. (In addition to taxes and insurance, that figure includes maintenance and utilities costs.)

It would add about $1,500 per month on top of a mortgage payment, up 26% from four years ago. While a new homebuyer should be able to budget for those costs, homeowners who purchased years ago could face struggles to meet their rising monthly cost burden.

Now, it seems that lenders and others in the distressed mortgage space view those rising hidden costs as the main risk factor for rising delinquency rates.

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The Auction.com survey was conducted in April, and respondents included banks, nonbanks, mortgage asset owners and investors, government agencies, and government-sponsored enterprises.

It should be noted that foreclosure activity in the U.S. currently remains very low by historical standards. In the first half of 2024, there were 177,431 U.S. properties with foreclosure filings, including default notices, scheduled auctions, or bank repossessions, according to ATTOM.

That figure was down 4.4% from the same period a year ago, and 40% below the first half of 2019, before COVID-19 pandemic moratoriums dramatically reduced foreclosures.

“Given the low default environment we’re in, this finding serves as an early warning of what could trigger more defaults in the future, especially if we continue to see more natural disaster events that, in turn, put more upward pressure on home insurance rates,” says Daren Blomquist, a vice president of market economics at Auction.com.

“It’s important to note that even though rising hidden homeownership costs represented the highest risk factor of rising defaults, the majority of our mortgage servicing survey respondents believe that foreclosure volume will rise only modestly for the rest of the year (less than 5%),” he adds in an email to Realtor.com®. “So these rising hidden homeownership costs represent the highest risk in a low-risk environment.”

According to LendingTree , only about 1 in 3,100 homes in the U.S. is currently vacant due to foreclosure.

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“One of the main reasons why foreclosures aren’t common is because most homeowners are sitting on mortgage rates below 5% and thus have very manageable monthly payments,” says LendingTree senior economist Jacob Channel.

“On top of that, strict lending standards implemented in the wake of the Great Recession help to ensure that, even if their rates and payments are high, people who get mortgages aren’t likely to default on them,” adds Channel.

However, the new survey results suggest that if foreclosure activity does begin to tick up, it might happen first in the areas where hidden costs such as insurance are rising the fastest.

Blomquist notes in May, foreclosure starts exceeded pre-pandemic levels in several markets in the Gulf Coast, Texas, and inland California, where storms and wildfires have caused significant damage in recent years.

Those markets included Houston (135% of pre-pandemic levels), Riverside-San Bernardino, CA (93%), Tampa-St. Petersburg, FL (100%), Orlando, FL (114%), and San Antonio, TX (104%), according to a map he created using the ATTOM data.

Those markets are all in states that ranked in the top 10 for insurance premium increases from 2018 through 2023 in the ATTOM data, he notes. That might be a coincidence, or rising insurance premiums could already be triggering elevated foreclosures in some areas.

“Although it’s too early to fully connect the dots, we do see more rapidly rising foreclosure starts in many of the major markets where insurance costs have been rising,” he says.

“Absent of broader economic or housing market shocks, we would expect the default trend to follow the uneven regional pattern,” adds Blomquist. “Markets with higher and faster-rising hidden homeownership costs would likely see a bigger increase in defaults. We are already seeing some signs this could be playing out when we look at recent foreclosure start data.”

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