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The Evolution of Housing Wealth

Household debt is on the rise driven by increased mortgage balances, but it’s slower this time as mortgage debt continues to remain relatively flat according to the latest research by the Federal Reserve Bank of New York [1] that was released on Thursday. Titled “The Home Prices, Housing Wealth and Home Equity Extraction” the report [2] focused on the evolution of housing wealth, its use as a collateral and its long-term implications for this housing cycle.

The report indicated that debt balances had increased $63 billion during the quarter driven by increased mortgage balances that grew $57 billion. Breaking up the household debt, the report revealed that though auto and student debt rose during the period, credit card and home equity lines of credit (HELOC) debts declined.

Household debt peaked during the quarter, the report said and as on March 31, 2018, it stood at $13.2 trillion, showing an increase of $536 billion than the previous peak recorded in the third quarter of 2008 and 18.5 percent above the trough in the second quarter of 2013.

“Although household debt has been growing for five years, its growth has been slow relative to earlier periods, as mortgage debt has continued to be relatively flat,” the report said. “In the first quarter, aggregate delinquency rates improved, as rates on mortgage and HELOC debt declined further, while delinquency on auto and credit card debt increased.”

Even though the report found that households continued to view housing as a good investment, it said that current homeowners had not used their home equity to finance consumption. According to Beverly Hirtle, EVP and Director of Research at the Federal Reserve Bank of New York, one of the factors could be mortgage credit that “has been quite tight in the wake of the financial crisis.”

These tight lending standards have lent to a slow growth in aggregate balances and continually improving delinquencies, the report found. In fact, the already stringent standards on HELOCs tightened further after the financial crisis with the required median score of new HELOC borrowers pegged at almost 800. Unlike HELOCs, the report said, even though mortgage standards had also been very tight since the crisis, underwriting for installment mortgages had loosened recently. Yet, homeownership seems to have fallen in recent years.

“Tight credit can limit the scope for renters to become owners and for current homeowners to access their equity,” Hirtle said. Though factors such as regulation and financial institutions’ wariness about using housing as a collateral as a lesson from the crisis could be responsible for this situation, the increase in other forms of debt, especially student loans, among younger borrowers, and lower credit scores could also be responsible for the fall in homeownership as well as using home equity, the report found.

The report found that those who had gained most housing wealth over the last decade were older borrowers with high credit scores and they are “probably less likely to need the credit that increased housing wealth could collateralize,” Hirtle said. “Those who do have a strong demand for credit and own some home equity may have trouble tapping it if they have less-than-stellar credit histories.”