Mortgage Debt
Mortgage balances have reached over 10 trillion dollars in debt in the fourth quarter in December of 2020. We’re ahead in our metrics today in year over year. We will be looking back on this time in real estate as a historical moment.
The Household debt service rate for mortgages (graph to the left) shows back in the housing crash it was 7.21% today it sits at 3.8% this is important because it shows the leverage of the consumer. This gives us the full picture of the leverage that the consumer has. During a bubble, consumers do not have much leverage.
10 trillion in mortgage debt on 138 million homes and 39-42% of homes do not have a mortgage. This shows home appreciation, also consumers have tons of equity which is a vital differentiation of where the market is and where we were when the market crashed.
So what does this mean? Mortgage balances have reached over 10 trillion dollars as of the fourth quarter. Even though the 10 trillion dollar figure can seem daunting, the household debt service rate for mortgages is currently 3.8% compared to 7.21% back during the housing crash. So what do all these figures mean? Essentially this all goes to show the leverage that consumers have today that consumers during the housing crash did not have. Consumers today have tons of equity in their homes which is a vital difference between where we are today and where we were when the market crashed.
Home Equity Cashed Out
56% of homes in this country have a
t least 50% equity. This is big. This is an instrumental part differing our market from a bubble. Even those in forbearance have equity. During the housing crash era, a lot of people cashed out and refinanced. This is shown on the graph at 320 billion compared to currently 103 billion for the first 3 quarters but projected to be 140 billion and that’s not factoring home price and inflation. People are handling their equity different today.
So what does this mean? More than half of the homes in the U.S have at least 50% equity. This is a big deal. This number includes homes in forbearance as well. This is yet another difference between our market and the market of a bubble. During the housing crash, a lot of consumers pulled their equity out of their houses and refinanced their homes as well. Today we are seeing people handle their equity very differently, as they aren’t pulling it or refinancing it.
Forbearance
The number of foreclosures with new foreclosures (graph to the left), shows as we look at the graph we see in 2009: 566,180 vs. 14,220 in the 4th quarter. The normal average per quarter is just over 200k. We sit at an extremely low number. There are reasons foreclosures have been pushed out and might be pushed out again by the administration, but we expect those numbers to go up. We encourage everyone to be the knowledge broker. Do more to clarify than terrify.
325k properties are in the danger zone. This leads to the question, are we going to see a wave of foreclosures? The answer to that is, we do not project a wave that overwhelms the system. If this wave did happen the current market would consume those properties. However, calculated projections show that in the next two years it’s going to be a steady flow of homes coming to the market
So what does this mean? We currently sit at an extremely low foreclosure number, it being 14,220 compared to the average of 200k. A reason for this includes, foreclosures being pushed out by the administration. They may even be pushed out again, but ultimately decisions will have to be made. This meaning it’s projected for us to see our number of foreclosures rise. Even if we were to see a wave of foreclosures, our current market would consume those properties.
Interest Rates
Interest rates are projected to be very favorable this year. Normally seeing a 3.25% interest rate would be great, but we have been seeing 2.2% and 2.8% interest rates which are absolutely insane. It’s understandable with interest rates beginning to rise consumers are nervous about what to expect. The great news is that rising interest rates are a sign of a strong economy and as much as we love low-interest rates we do need a strong economy. This being said, rates are going to rise. Also, a good thing to remember is that the Fed does not 
determine long-term interest rates (as seen in the graph to the right). We see that the treasury rate is rising and that suggests interest rates will rise as well. There are multiple temporary factors that are driving up rates, the underlying economic fundamentals point to rates remaining in the low 3% range for the year which is still a favorable rate.
Conclusion
In closing, we agree with this data as well as its projections for this year. Again, we want to encourage everyone to go to the data to answer your questions. The data shows us many supporting reasons for why we are not in a bubble and this data needs to be shared. A tip moving forward is to ask consumers, “How has the pandemic made you look and feel different about your home”?
As always we are your friends in real estate, here for all your real estate needs.
The Freund Group with Compass Real Estate.