Household Mortgage Debt Share Falls to New Lows, but Risks Lie Ahead

Mortgage Debt Falls Nine Straight Quarters, but Negative Equity May Rise at the End of 2019

By Ralph McLaughlin Mortgage Finance, Risk Management

Household mortgage debt in the U.S. fell to 64.4. percent of total household debt in the fourth quarter of 2018, according to the latest Federal Reserve Financial Accounts data release. This percentage makes up the lowest share of household debt since the fourth quarter of 1987. Mortgage debt now makes up only 65.4 percent of disposable household income, which is the lowest since the first quarter of 2001. This has now decreased over the last nine quarters.

U.S. Household Mortgage Debt

Household mortgage debt grew just 0.4 percent year over year on an inflation and homeownership-adjusted basis. This slight increase brought the mortgage debt total to $10.3 trillion and $129,683 per owner-occupied household, which is the lowest since the third quarter of 2004. What’s more, the value of homeowners’ real estate grew by an inflation-adjusted 3 percent over the past year, increasing household’s real estate assets as a share of total assets to 21.5 percent.

Real Household Mortgage Debt

A stubborn, long economic expansion and seven years of strong home price appreciation continue to pull many homeowners up from underwater. Per the CoreLogic Home Equity Report released this morning, the share of mortgaged homeowners with negative equity fell to 4.2 percent in the fourth quarter of 2018, which is down from a cycle-high of 25.9 percent in the first quarter of 2010. The share is also down noticeably from 4.9 percent in the fourth quarter of 2017.

Share of Mortgages Underwater

Recent geographic variation in home price growth has also led to fewer homeowners being underwater in some markets. Metros in states that saw significant housing market collapse in home equity have experienced some of the largest negative equity decreases. Leading the charge was Lakeland, Florida, which has seen a drop in the share of households with negative equity to 6.7 percent in the fourth quarter of 2018 compared to 11 percent just a year ago. Las Vegas, Ocala, Florida, Orlando, Florida and Atlantic City, New Jersey round out the top five cities with decreases of 4.2, 2.9, 2,9 and 2.8 percentage points, respectively, over the past year.

20 Metros with Largest YOY

With home price growth slowing in many areas of the country, we expect household equity to also slow in 2019. It’s also entirely possible that the share of homes in negative positions could rise at year’s end. Why? Simply put, as younger households – who tend to make lower down payments – start buying homes this spring, the seasonal downward swing in home prices during the fall and winter may put some of these new homeowners in a negative equity position. Markets with slower year-over-year changes in prices are especially prone to this phenomenon. However, such an increase in negative equity would fade into the following spring buying season.

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