As many mortgage repayment and loss mitigation experts already know, the metrics that govern home coverage – price, inventory, and mortgage rates – tend to be trailing metrics. The underlying conditions that drive them often take months to build before they move in a meaningful direction.
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Viewed through that lens, several indicators now clearly indicate that a housing crisis cycle is already forming. These indicators form a pattern seen in every distressed housing cycle to date. Nothing is particularly subtle at this point.
In this article, we look at four specific indicators of consumer stress in the credit market and how they can impact the real estate market.
Indicator 1: Delinquency data is changing
The Mortgage Bankers Association tracks how loans progress through the stages of delinquency: 30 days late, 60 days, 90 days, and into default. As loans begin to move through these stages, a pipeline of distressed properties is already forming.
Roll rates, as debt collectors call them, have been creeping up from historic lows following pandemic-era stimulus programs and foreclosure moratoriums. The overall trend is gradual, which may be why it has not received much attention. However, the configuration of stress concentrations is just as important as the overall numbers.
Delinquency rates for FHA-insured mortgages currently range from 11% to 12%, significantly higher than for conventional loans. This is important because FHA borrowers made up the majority of buyers who entered the market during the 2021-2025 peak period. They have higher debt-to-income ratios, put down relatively small amounts of capital, and started with limited financial reserves.
Once these borrowers reach the 90-day threshold, their realistic path to resolution narrows significantly. Modifying loan terms seems like a viable solution, but it is far less effective than policymakers envision.
For households that already spend more than 60 percent of their gross income on housing and debt, changing payment schedules can often address the symptoms rather than the underlying problem. This is not sustainable, and at that level of financial stress, loan modifications will actually only delay the inevitable.
Indicator 2: The number of “severe submergence” cases is underestimated.
Approximately 1.2 million homeowners met the industry standard definition of “severe water damage” as of early 2025, according to Kotality’s 2025 Q1 Homeowner Equity Report. However, this designation is limited to homeowners whose mortgage balance exceeds the home price by at least 25 percent. That number is increasing every quarter. That’s also a huge undercount.
A standard negative equity calculation compares the loan balance to the estimated property value. Actual sales costs are not included. In most markets, fees, closing costs, concessions and transfer taxes add up to 8-10% of the sales price.
Homeowners who look modest on paper may find they need to bring in cash by closing to actually sell. When these transaction costs are included in the calculation, the number of borrowers with truly distressed stock positions more than doubles.
Beyond the 1.2 million homeowners, an additional 3 million to 4 million homeowners may have technically positive but functionally insufficient equity to exit through a traditional sale. That means short selling may be the most viable path available to them, even if they don’t fully realize it yet.
Indicator 3: Consumer credit is sending the same signal.
Housing stress rarely occurs in isolation. Rather, it tends to go hand in hand with consumer credit stress, and the broader credit landscape cannot be ignored. According to the Federal Reserve Bank of New York, credit card balances in the U.S. exceed $1.28 trillion, the highest level on record, and the delinquency rate on those balances is also rising.
The delinquency rate for subprime auto loans is more than 6.9% after 60 days, and the overall delinquency rate for auto loans is nearly 5% after 30 days, according to market data from Cox Automotive. As consumers retreat, car inventories are building up significantly.
Historically, deterioration in auto loan and credit card performance appears several quarters before widespread housing stress develops. There is considerable overlap between the borrowers under pressure in these categories and those most at risk in the mortgage market, with young, low-income households taking on debt from multiple directions simultaneously.
Indicator 4: Cost of ownership continues to rise
Another factor causing stress for borrowers is the continued rise in housing costs beyond the mortgage itself. Mortgage underwriting collects principal, interest, taxes, and insurance at the time of origination. What we don’t know is how those costs will change over time.
Property taxes increased significantly in many markets. HOA fees have increased. Maintenance costs are high, especially for first-time buyers of older homes that are out of reach for new construction. And insurance premiums have become truly volatile in many states, with some homeowners in coastal and southern markets absorbing price increases that bear little resemblance to what they were able to afford at the time of purchase.
Each of these costs increases the effective debt-to-income ratio for borrowers who were already close to their limits. For households with limited financial resources, one unexpected expense can throw the budget into overdrive.
where is this going
These indicators do not indicate that the collapse of the entire system is imminent. They point to something more targeted. It’s a growing pipeline of distressed borrowers, concentrated in certain types of loans and in certain regions. In particular, they are concentrated in markets that have seen rapid price increases from 2020 to 2023 and are currently battling soaring insurance premiums. Florida, Texas, Arizona and Georgia are among the states already showing early stress patterns.
These are not hypothetical warning signs, but rather the early stages of a housing distress cycle that has already begun.
The formation cycle of distressed real estate is likely to be measured in years rather than quarters. For servicers, lenders, and real estate professionals working on this side of the market, the lead-up period is currently open and will not remain open indefinitely.
The train has left the station. The only question that remains is how big the pipeline of distressed real estate will ultimately become.
Michael Kerin is President of the National REO Brokers Association (NRBA) and Managing Partner of House Karma. Connect with Michael on LinkedIn or Facebook.
