Mortgage rates are soaring, but higher credit quality means there likely won’t be a default crisis like the 2008 crash, Goldman Sachs says

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  • Mortgage rates are up and home prices are down, but Goldman Sachs doesn’t see another default crisis.
  • The bank pointed to new credit regulation resulting from the 2008 housing crash, which will likely shelter the market from a wave of defaults.
  • “Our analysis suggests that a surge in delinquency rates is unlikely over the next year.”

Mortgage rates have soared and home prices have fallen this year, but don’t expect another default crisis like the 2008 housing crash, according to Goldman Sachs.

“Robust credit quality is likely the most important reason not to expect a mortgage default crisis. The 2008 housing and mortgage crisis led to a significant increase in mortgage credit quality,” economists at the investment bank said in a note on Tuesday, referring to regulations aimed at preventing risky subprime loans.

New rules, such as minimum credit scores required for mortgages and restrictions on loan levels, will likely shelter housing markets, said the note, which looked at the US and other top English-speaking countries.

That comes amid a shaky year for the housing market, with US mortgage rates soaring past 7% and experts sounding alarms for a potential housing crash. It’s largely been fueled by the aggressive rate hikes from the Federal Reserve and other central banks as they scramble to rein in inflation. 

Already, that’s lifted US mortgage rates nearly 400 basis point this year. But Goldman pointed out that since most mortgages in the US are at set fixed rates, as opposed to floating rates, the surge is unlikely to result in defaults.

It also puts the US housing market at a smaller risk of a rate shock compared to countries like the UK, Canada, and Australia, where floating rates are more common, according to the note.

There’s also concern the Fed’s rate hikes could push unemployment higher, which would lead to more defaults on mortgages, but those risks are also “quite small” compared to other countries, Goldman said. In the US, a 100-basis-point increase in unemployment would lead to just a 10-basis-point increase in mortgage delinquency – below levels estimated in Australia and Canada.

And while home prices have fallen, that’s also unlikely to lead to strategic defaults, a situation where a borrower walks away from mortgage payments due to the deteriorating value of the property. Goldman pointed to a study from the National Bureau of Economic Research that found only 6% of mortgage defaults in the US are strategic, meaning falling home prices are expected to only “moderately increase” mortgage defaults.

“Our analysis suggests that a surge in delinquency rates is unlikely over the next year,” the bank said.

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