Why is mortgage debt not a lot higher?

Americans have a lot of mortgage debt, but is that something to worry about?

Any number of news outlets have recently reported that mortgage debt has reached record levels. CNN Business, as one example, explained on November 17th that “low interest rates have helped fuel a boom in the US housing market: Last quarter Americans’ mortgage debt climbed to a record high of nearly $10 trillion, the Federal Reserve Bank of New York reported Tuesday.”

According to Rick Sharga, Executive Vice President with RealtyTrac, a leading source of investor leads and real-estate data, “the stories about record borrowing levels are entirely true. But the more interesting story is that mortgage financing levels are not even higher. There is considerable evidence that borrowers are avoiding housing debt rather than embracing it. The result is a massive amount of real estate equity, personal wealth that protects borrowers, lenders, and mortgage investors during tough times.”

The Federal Reserve Bank of New York (FRBNY) carefully monitors consumer debt. It publishes new figures each quarter and the headlines regarding record levels of mortgage debt are derived from these reports. The published numbers include several measures.

  1. The total amount of MORTGAGE debt.
  2. The total debt represented by HELOCs (home equity lines of credit).
  3. Mortgage debt plus HELOC debt together equal total HOUSING debt.

While mortgage debt tells us how much is owed, HELOCs tell us how much might be owed. Think of a credit card. You can have a $15,000 line of credit but you might also owe only $200. The rest is potential debt. A HELOC is basically a huge credit card secured by real estate.

Missing Debt

For the third quarter, says the New York Fed, the numbers look like this:

  • Mortgage balances – the largest component of household debt – rose by $85 billion in the third quarter, and reached $9.86 trillion on September 30. This is a record high.
  • Balances on home equity lines of credit saw a $13 billion decline, their 15th consecutive decrease since 2016Q4, bringing the outstanding balance to $362 billion.
  • Total housing debt amounted to $10.22 trillion

Here’s the catch. Twelve years ago – in the third quarter of 2008 – total housing debt amounted to $9.99 trillion. The typical home in the third quarter of 2008 sold for $226,500 according to the Census Bureau, a price that reached $324,900 in the third quarter of this year.

In other words, the price of a typical home increased by $98,400 during the past 12 years – 43.4%. At the same time the amount of housing debt grew from $9.99 trillion to $10.22 trillion. That’s an increase of $230 billion or 2.3%.

What these numbers show is a mortgage financing revolution. Despite a huge decline in mortgage rates – the typical 2008 rate was 6.03% versus 2.83% in October according to Freddie Mac – borrowers are staying away from housing debt.

“Homeowners can take out far more mortgage debt,” says Sharga. “They have huge amounts of equity. According to ATTOM Data Solutions, 16.7 million US homes are equity rich. Debt secured by the property represents less than 50% of fair market value. At the other end of the scale, 3.5 million homes are seriously underwater. The property is worth at least 25% less than the debt it secures.”

So why is it that equity-rich borrowers are staying away from mortgage debt when rates are at or near historic lows?

It’s a matter of speculation but one answer looks like this: In the same way that grandparents and great grandparents were shaped by the Great Depression, much of the public today remembers the 2006 mortgage meltdown and the foreclosures, unemployment, and bank failures it created. No one with any sense wants to repeat that experience.

One result is that the public added $1 trillion in additional bank deposits in each of the first two quarters this year. They didn’t spend the money. They’ve held down borrowing. They’re paying down credit card balances. Credit scores have hit new highs.

Many people see the near future as uncertain. The experiences of the mortgage meltdown and massive financial dislocations from the pandemic mean it’s time to stock-up on more than toilet paper and hand sanitizer.

People want a cushion, a reserve, just in case income falls, jobs go away, or businesses close. It’s not an irrational thought – and it may explain why so much real estate equity remains mortgage-free.

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