MW More people are late on both their mortgage and student-loan payments - another bad sign for the economy

By Aarthi Swaminathan

The trends come at a time when the U.S. economy is showing signs of weakness

Parts of the housing market are showing signs of distress - including homeowners with mortgages backed by the Federal Housing Administration.

An increasing number of borrowers are falling behind on both their student-debt and mortgage payments - a development that's worrying economists about the state of the housing sector and the broader U.S. economy.

Student-loan delinquencies are rising sharply, as are delinquencies on mortgages backed by the Federal Housing Administration, according to a new report by the Federal Reserve Bank of New York.

The New York Fed's data indicate that one-tenth of student-loan debt was reported as seriously delinquent in the second quarter of this year, meaning those borrowers were 90 days past due on payments.

The analysis also shows even though FHA mortgages - typically used by first-time and lower-income buyers - only make up about 12% of mortgage balances, the delinquency rate on those loans has been the steepest. Nearly 40% of borrowers with an FHA loan had missed a single payment - higher than the share of FHA borrowers who did so before the pandemic, in the first quarter of 2019, New York Fed researchers said.

Student-loan delinquencies could hurt future housing demand

Both the student-loan and FHA-delinquency trends come at a time when the U.S. economy is showing signs of weakness.

If younger people are "drowning in debt" and the labor market starts to crack, "this gets uglier fast," Orphe Divounguy, an economist at Zillow (Z), wrote on LinkedIn. July's jobs data, released last week, showed a marked slowdown in hiring.

As more young, aspiring homeowners see their credit scores drop from the impact of student-loan delinquencies, it will likely take time for them to bring their scores up to a level that would allow them to take on a mortgage, Divounguy told MarketWatch in an interview.

That could lead to lower demand for housing in the future and would be bad news for the industry, which last year saw home sales fall to the lowest level in about 30 years, according to the National Association of Realtors. Home sales have remained subdued for most of this year.

"The rise in defaults on student debt is especially concerning," Jessica Lautz, deputy chief economist at NAR, told MarketWatch, "as the share of first-time home buyers has already declined to record lows and the age of first-time home buyers has hit all-time highs." The typical first-time buyer in the U.S. is now 38 years old, compared with age 35 the year before.

If we were to see the job market weaken further and layoffs increase, then we would "need to worry about the U.S. economy," Divounguy said. Should people who are already falling behind on their auto-loan, credit-card and student-loan payments end up losing their jobs, the economy would face a "massive headwind" as consumer spending takes a hit, he added.

Related: Home prices hit an all-time high, but some regions are seeing price declines

Rising FHA delinquencies a cause for concern

Jake Krimmel, a senior economist at Realtor.com, said that he's more worried about the increase in delinquencies among homeowners who have an FHA-backed mortgage. While FHA loans make up a relatively small share of the market, they're over four times more likely than non-FHA loans to fall into delinquency, he told MarketWatch.

The rise in mortgage delinquencies may also be an early indicator of distress among American consumers. "The real warning sign is that rising mortgage delinquencies may signal a softening labor market," Krimmel said. "This is especially true in certain regions and among lower-income households."

Most of these FHA mortgages are concentrated in the South, where home prices are falling the fastest. Homeowners in that region are increasingly cutting prices to sell homes, per Realtor.com data. (Realtor.com is operated by News Corp subsidiary Move Inc.; MarketWatch publisher Dow Jones is also a subsidiary of News Corp.) The New York Fed's analysis found FHA delinquencies were relatively more elevated in Southern states and Puerto Rico.

"If price declines continue, some recent FHA borrowers may find themselves underwater, increasing the risk of distressed sales and putting further downward pressure on prices in those markets," Krimmel said.

More homeowners are underwater on their mortgages

The share of homeowners who are underwater on their mortgages - meaning that they owe more on their mortgage balance than what their home would sell for in the current market - has been growing recently.

The percentage of mortgages that are underwater was highest in June in places where prices skyrocketed during the pandemic, such as Cape Coral, Fla., and Austin, Texas, according to data provided to MarketWatch by Intercontinental Exchange $(ICE)$.

Falling home prices could serve as a double whammy for these homeowners: Not only are they grappling with missed debt payments, but they could also potentially lose money on their home if they were forced to sell.

To be sure, it is "too early to say this is happening at scale," Krimmel noted, though it is a trend worth watching closely.

Below is a map of the top five markets where homeowners with a mortgage had the highest share of negative home equity, as of June 2025.

-Aarthi Swaminathan

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August 07, 2025 06:00 ET (10:00 GMT)

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