Americans are digging themselves out of mortgage debt.
Home equity in the first quarter rose to $6.7 trillion, the highest level since 2008 as homeowners taking advantage of record-low borrowing costs to refinance their loans brought cash to the table to pay down principal.
The gain in percentage terms was the biggest jump in more than 60 years, according to an analysis of Federal Reserve data.
It’s the strongest sign yet that Americans’ home-loan debt burden is beginning to ease after the record borrowing that created, and ultimately popped, the housing bubble, leaving almost a quarter of homeowners with mortgages owing more than their properties were worth, said Richard DeKaser, deputy chief economist at Parthenon Group LLC in Boston. Half the mortgages refinanced in the fourth quarter reduced loan size, a record, according to Freddie Mac, the government-owned mortgage buyer.
“The willingness of homeowners to carry housing debt has been radically altered,” said DeKaser, former chairman of the American Bankers Association’s Economic Advisory Committee. “When the market was booming, a mortgage was used as a leveraging tool, and now it’s seen as a risk.”
Measured as a share, rather than in dollars, homeowner equity was 41 percent of U.S. residential property value in the first quarter, including homeowners who don’t have mortgages, according to the Fed study released last week. The last time the share was that high was in the third quarter of 2008.
“People got too overleveraged in the boom years, and that left them with too much debt when the bubble burst,” said Paul Miller, a managing director with FBR Capital Markets in Arlington, Va. “Now, they’re trying to put themselves back on solid ground.”
Residential mortgage debt peaked in 2007 at $10.6 trillion, doubling in six years, according to Fed data. Since then, it has fallen 7 percent as the value of all residential property has dropped 23 percent.
Americans aren’t just bringing money to the table when they refinance their mortgages. Many also are choosing to shorten the term of their loans, which increases monthly payments. The average mortgage term fell to 27 years in March and April from 29 years in February. Almost all U.S. mortgages have either 30-year or 15-year terms. When the average falls, it shows more people are choosing the shorter period.
DeKaser of Parthenon attributes the reduction in mortgage debt to a “fear factor.” A lackluster recovery that still has one of every 15 people unemployed has convinced some borrowers of the wisdom of thriftiness, he said.
“People are worried about falling home prices, and they’re worried about the economy,” DeKaser said. “If they can afford it, they’re paying down their mortgages instead of buying things because it makes them feel like they’ll sleep better at night.”
About 23 percent of mortgage holders are underwater on their loans, meaning they owe more than their homes are worth, according to CoreLogic Inc., a mortgage data and software firm in Santa Ana, California. About 2.1 million properties were in foreclosure in April, according to Lender Processing Services, a mortgage data firm in Jacksonville, Florida.
“Consumers’ view of the housing market clearly has been radically changed since the bubble days,” said Dean Maki, chief U.S. economist at Barclays Plc in New York. “We saw what happened to people who were way overleveraged.”
“Paying down mortgage debt is bad for economic growth — putting your money into your house usually means you’re spending less,” FBR’s Miller said. “It’s good for our economic health in the long run, though, because it improves household balance sheets.”