With the housing market engaged in a slow recovery and many consumers still recovering from the effects of the Great Recession, it stands to reason that mortgage debt is staying relatively steady. The New York Fed reached the same conclusion in their recent quarterly report on U.S. household debt. While mortgage debt is still the largest component of household debt, the percentage has dropped since the housing crisis — from 79% of the total in 2008 to 72% at the end of 2015.
Overall, mortgage debt has only risen by 1% since 2012 to its current value of $8.74 trillion, in part because Americans are making more progress in paying down their mortgages than in past years. Americans paid 3.5% of their outstanding mortgage debt ($288 billion) in 2015. Compare that to the pre-housing crisis year of 2006, when Americans paid $170 billion out of the $8.25 trillion mortgage debt, constituting 2.1% of the balance.
Multiple factors in the post-crisis housing market are combining to keep the increase of mortgage debt on a slow pace. Fewer home sales, lower interest rates, and lower use of equity all reflect the new situation imposed by the housing crisis.
After the housing market collapse, fewer people were purchasing homes and adding to the total mortgage debt. Refinancing became equally difficult. With fewer new mortgages, the average amount of mortgage debt shifted further down the amortization process. As a result, more payments are now being directed toward principal, driving the debt down more quickly with each payment.
At the same time, baseline interest rates dropped dramatically. The weighted average interest rate on outstanding mortgage debt has almost been cut in half over the last fifteen years, dropping to 3.85% in 2015 from 7.65% in 2000. Credit tightening after the housing crisis meant that those who could still afford to buy homes had excellent credit and represented low risk, skewing the average interest rates even lower.
During the housing boom, people began to look at the equity in their homes as a resource to be tapped. From 2003 to 2007, enough homeowners drew off their home's value using home equity lines of credit (HELOCs) or extended themselves with cash-out refinances that the total value of these transactions increased by $300 billion each year. Those debts only grew by a tenth of that total in 2015. Total HELOC outstanding balances actually decreased by $5 billion in Q4 of 2015 and were down by $23 billion year-over-year.
Not only is mortgage debt decreasing, delinquencies are decreasing as well. The recent report by the New York Fed shows slight improvement, with 2.2% of mortgage balances showing as ninety days delinquent. That is down from 2.3% in the third quarter, and continues a general five-year trend of improved payment records. Assuming this trend continues, delinquency levels should reach pre-housing-crisis levels in approximately four to five more quarters.
While this is good news in many respects, the size of the remaining mortgage debt underscores the continuing fragility of the housing market. Home ownership constitutes the greatest asset for many people, serving sometimes as a source of collateral for other loans — and it may also make up a significant part of expected retirement revenue for lower-income homeowners.
If we learned anything from the housing crisis, it is that putting too much of your assets into real estate is a dangerous thing. The housing market can crash just like the stock market can, and recovery in real estate can take a long time.