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Lengthy Housing Recovery Helps Reduce Household Mortgage Debt to 30 Year Lows

Lengthy Housing Recovery Helps Reduce Household Mortgage Debt to 30 Year Lows

Mortgage debt as a share of total household debt dwindles to levels not seen since 1988.

By Ralph Mclaughlin housing affordability, Mortgage Finance

Household mortgage debt in the United States fell to 64.6 percent of total household debt in the third quarter of 2018, according to the latest Federal Reserve Financial Accounts data release. Mortgage debt now makes up the lowest share of household debt since the first quarter of 1988. As a share of disposable household income, mortgage debt now makes up 65.9 percent, which is the lowest since the second quarter of 2001.

Household mortgage debt grew just 0.1 percent year-over-year on an inflation and homeownership-adjusted basis, increasing to a total mortgage debt of $10.3 trillion and $131,463 per owner-occupied household. The latter is the second lowest since the first quarter of 2004, with last quarter being the lowest.  What’s more, the value of homeowners’ real estate grew by an inflation-adjusted 3.6 percent over the past year, helping homeowner’s real estate assets as a share of their total assets hold steady at 20.5 percent.

While the cycle is long in the tooth, a long economic expansion and housing market recovery has helped households who have been under-water rise above the red. Per the CoreLogic Home Equity Report, released this morning, the share of mortgaged homeowners who are in negative equity fell to a cycle low of 4.1 percent in the third quarter of 2018, which is down from a cycle high of 25.9 percent in the first quarter of 2010 and down from 5 percent last year.

Last, recent geographic variation in home price growth has led some markets to see substantial decreases in the number of underwater homeowners. Metros in states that saw significant housing market collapse in home equity have seen some of the largest decreases in negative equity. Leading the charge was Las Vegas, which has seen a drop in the share of households with negative equity to 5.1 percent in the third quarter of 2018 compared to 10.3 percent just a year ago. Lakeland, Orlando, and Ocala, Florida, and Detroit, Michigan round out the top five, with decreases of 3.9, 3.3, 3, and 2.7 percentage points, respectively, over the past year.

What does all this mean in the face of a softening housing market? First, it’s a sign that households would be in much better shape should a recession unfold. Low homeowner equity at the cusp of the Great Recession put many households at risk of foreclosure, so increases in equity put them in a better position to weather the impact of an economic downturn. Second, holders of mortgage notes can rest easy knowing that their portfolio is likely in much better shape than it might have been at the start of the previous recession. Last, housing markets that were hit hard during the Great Recession are seeing significant increases in homeowner equity, which will help these areas minimize concentrated risk of foreclosures

Dr. Ralph B. McLaughlin is deputy chief economist and executive of research and insights for CoreLogic.

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