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 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 when it was 43 percent.
“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. “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 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.
The average U.S. rate for a 30-year fixed mortgage has tumbled since early 2011 to 3.71 percent last week, rising from the previous week’s record-low 3.67 percent. Refinancing applications, meanwhile, are at a three-year high.
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 persuaded 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.”
Home prices tumbled for six straight months through March to the lowest level in a decade, 35 percent below the peak prices of the housing boom, according to the S&P/Case-Shiller price index of 20 U.S. metropolitan areas. A 3.4 percent increase in home sales last month may signal prices are beginning to stabilize, according to Eric Belsky, managing director of Harvard University’s Joint Center for Housing Studies, in its “State of the Nation’s Housing” report.
The U.S. economy is expected grow at a 2.2 percent pace in 2012, the third year after the end of the recession, according to the median forecast of 93 economists surveyed by Bloomberg News. That compares with a 3.9 percent average expansion rate in the third-year period following the 1982, 1994, and 2001 recessions. In 2013, the growth rate probably will be 2.4 percent, according to the economists’ average estimate.
Homeowners who are able to shorten the terms of their loans or reduce their balances when they refinance are the lucky ones, said Chris Christopher, a senior economist at IHS Global Insight in Lexington, Mass.
“Homeowners who are paying down mortgage debt are the survivors,” Christopher said. “They probably didn’t lose their jobs, so they’re in a better position to do that.”
About 23 percent of mortgage holders are underwater on their loans, meaning they owe more than their homes are worth, according to CoreLogic, a mortgage data and software firm in Santa Ana, Calif. About 2.1 million properties were in foreclosure in April, according to Lender Processing Services, a mortgage data firm in Jacksonville, Fla.
“Consumers’ view of the housing market clearly has been radically changed since the bubble days,” said Dean Maki, chief U.S. economist at Barclays 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.”
Retail sales in the United States fell in May for a second month, prompting economists to cut forecasts for economic growth as limited job growth and income gains hold back consumers. The 0.2 percent decrease matched April’s drop that was previously reported as a gain, Commerce Department figures showed.
Annual increases in national income slowed to $581 billion in 2011 from $693 billion in the prior year, according to the Bureau of Economic Analysis. The first quarter’s $127.7 billion gain puts 2012 on course for a $510.8 billion increase, the lowest since income dropped in 2009.
“People are looking around them and seeing people they know getting their salaries cut or losing their jobs,” said Miller, a former examiner with the Federal Reserve Bank of Philadelphia. “If you want security, you can put your money in a savings bank for half a percentage point, or you can pay down your mortgage.”
Miller said when he refinanced his home loan last year, he “brought a big check to the table” to reduce his mortgage balance. The reason?
“So my wife would leave me alone,” Miller said. “Just like a lot of people, she wants to have no mortgage debt.”
— Bloomberg News