Housing Risk #7. The (Non- Mortgage) Debt Bomb The weird thing about mortgage debt is that we have less of it. Between 2008 and the start of 2017 mortgage debt declined from $9.99 trillion to $9.08 trillion, a drop of $910 billion according to the Federal Reserve Bank of New York. Given that we have had consistently rising home prices during the past five years it’s surprising to see less mortgage debt. “Total household debt achieved a new peak in the first quarter of 2017,” explains the New York Fed, “rising by $149 billion to $12.73 trillion – $50 billion above the previous peak reached in the third quarter of 2008. Balances climbed in several areas: mortgages, 1.7 percent; auto loans, 0.9 percent; and student loans, 2.6 percent. Credit card balances fell 1.9 percent this quarter.” The Bubble Danger: The explosive growth of non-housing debt can smother the first-time buyer market and with it a good part of the housing sector. Between 2008 and this year student debt rose from $640 billion to $1.34 trillion. Auto lending increased from $790 billion to $1.17 trillion. Potential mortgage borrowers saddled with a lot of non-housing debt may not qualify under generally used debt-to-income ratios (DTI). The solution? Some mortgage programs now allow higher DTIs, say a 50-percent DTI instead of 43 percent. Is this a formula for excess risk? We’ll find out in the next few years. Meanwhile overall debt is increasing.
HOME SELLER PROFITS BY METRO Q2 2017 AVG HOME SELLER PCT RETURN SINCE PURCHASE -10.3% 74.5%
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An External Threat But Gardner suspects the threat to the housing market will likely not rise from inside the market but from outside. “If we see a recession in 2019, which I’m expecting, it will not be driven by housing. What it will be driven by is unknown,” he said. “What exogenous shock will come that will cause that bubble to burst?”
Along with lending standards, Gardner keeps a close eye on average home equity rates and speculation as the best predictors of a bubble. None of those indicators are pointing to a bubble at this point, although Gardner said that could change. “Could this come off the rails? Yes it could, if banks start egregiously lowering the mortgage standards,” said Gardner, who noted he is seeing some early evidence that non-traditional bankers are “starting to rear their ugly head again.”
In the meantime, Gardner takes solace in the reality that Seattle housing is still
JULY 2017 | ATTOM DATA SOLUTIONS
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