American Debt: Mortgage Debt Reaches $9.33 Trillion in 4Q 2017
Mortgage balances climbed 1.6%, or $139 billion, in the fourth quarter of 2017, and mortgage debt is up $402 billion from the fourth quarter of 2016, according to the latest data from the Quarterly Report on Household Debt and Credit from the Federal Reserve Bank of New York. Housing debt now totals $9.33 trillion, close to the $9.99 trillion peak we saw in the third quarter of 2008.
Despite being the largest increase in several quarters, mortgage balances remain 4.4% below their 2008 peak and are far below their previous highs in the states most affected by the housing crisis, such as Florida, Arizona, Nevada and California. By contrast, Texas, North Dakota and Delaware have mortgage balances more than 10% higher than their previous peaks. Higher mortgage balances are said to be indicative of greater recovery or having been less affected by the crisis in the first place.
Mortgage Debt Seems Like a Good Bet for Lenders
The median credit score of borrowers for new mortgages declined from 760 to 755 – still in the very good range. Even better, the percent of seriously delinquent mortgages – those with no payments in 90 days or more – continued to improve. The fourth quarter saw a 5% increase in the number of mortgagees in early delinquency who caught up on their payments, and foreclosures are at record lows, with about 70,000 individuals having a new foreclosure noted on their credit reports. (For more, see 6 Tips to Get Approved for a Mortgage.)
After home-equity debt, mortgage debt has the lowest delinquency rate of any type of household debt. Just 1.3% of mortgages were seriously delinquent (more than 90 days) at the end of 2017, according to the Quarterly Report on Household Debt and Credit.
Using different data than the Federal Reserve (which uses Consumer Credit Panel/Equifax data), TransUnion measures more-than-60-day mortgage delinquency rates and shows that they’ve dropped from a peak of 7.21% in the first quarter of 2010 to a low of 1.83% in the fourth quarter of 2017. TransUnion predicts that in 2018 the mortgage delinquency rate will drop to its lowest level since 2005 – 1.65% – thanks to rebounding housing prices, strong employment and rising household income. Besides strong economic factors, delinquencies are relatively low because people prioritize their housing payments, as the consequences of falling behind on a mortgage are much more severe than the consequences of falling behind on credit card or student loan payments, which have delinquency rates of 4.6% and 11%
Mortgage Debt Fuels Total Household Debt
Mortgage debt is the largest component of total household debt, which rose $193 billion to reach an all-time high of $13.15 trillion after increasing for 14 consecutive quarters. Mortgage balances make up 71% of total household debt.
Mortgage originations, which include both new mortgages and refinances, dropped to $452 billion from $479 billion in the third quarter, perhaps a result of the lower demand for homes typical of fall and winter months and of rising interest rates. Existing home sales fell 3.6% in December, according to the National Association of Realtors. However, they increased by 5.6% in November and 2.0% in October.
Average mortgage debt per borrower, according to TransUnion, stood at $200,935 last quarter. The total number of mortgage accounts is up to 52.7 million from 52.0 million in the fourth quarter of 2016. The 52.7 million number has been flat over the last three quarters, which means the number of new mortgages (originations) is about equal to the number of mortgages being paid off. Mortgages can be paid off due to a sale, refinance or wanting to own the home free and clear.
Mortgage Interest Rates Are Rising
TransUnion expects rising interest rates in 2018 to push the share of new mortgages coming from refinances down from 35% in 2017 to 28% in 2018. (For more, see 6 Questions to Ask before You Refinance.) Thirty-year fixed mortgage rates increased slightly, from 3.83% on Sept. 28, 2017, to 4.42% on Feb. 8, 2018. The Federal Reserve increased its target federal funds rate by 0.25% in mid-December; rates in mid-February stand at 4.51%, their highest point since April 2, 2014.
TransUnion says rising interests rates have affected refinancing but not purchasing activity. U.S. home sales in 2017 were the strongest since 2006. The median national home price in December was $246,800, and four of the five hottest housing markets were in California. (For more, see How to Buy Your First Home: A Step-by-Step Tutorial.)
What Does Increasing Mortgage Debt Mean?
Is this high and increasing amount of mortgage debt a good thing, or does it mean that people are overextending themselves again and another housing crash is imminent? According to a statement by Joe Mellman, TransUnion’s senior vice president and mortgage line of business leader, we needn’t worry: “Rising home prices, solid underwriting criteria and a strong economy have led to an extremely low level of risk in the mortgage industry, which will likely continue into 2018.”
Mellman expects housing demand to remain strong but believes that home buyers will have difficulty with the tight supply of entry-level housing, thanks to rising interest rates and the high cost of moving up to a nicer home. One reason entry-level housing is tight is that many existing homeowners have low-interest mortgages that they don’t want to leave, and, on top of that, they may not be able to afford today’s pricier homes. The effects of December’s tax bill may also impact the housing market, but we don’t yet know if or how. (For more, see How the GOP Tax Bill Affects You.)
The Bottom Line
Rising mortgage balances in the fourth quarter of 2017 don’t appear to be a cause for alarm, as they were when the housing bubble was inflating and the Great Recession was brewing. Few consumers are delinquent on their loans, many of those who are delinquent are catching up and foreclosures are at record lows. As the year progresses it will be interesting to see how tight inventory, rising interest rates and the tax bill affect the housing market and mortgage borrowers.