Rising Mortgage Debt
Erodes Home Equity
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- Americans continued to rack up mortgage debt at double-digit rates in the first quarter, driving down their home equity to a record low relative to their home values.
Real-estate-backed borrowing has been a major source of support for the economy, as consumers use those funds to renovate or buy goods and services. Some analysts worry, though, that the debt loads could leave households exposed if home values slide or unemployment rises further. Even if that doesn't happen, some argue homeowners have to slow their borrowing to rebuild savings eroded by lower stock values.
Separately, the U.S. labor market continues to weaken as new claims for unemployment insurance rose last week to a five-week high.
Household debt rose at a 10% annual rate in the first quarter from the fourth, the second straight double-digit increase, the Federal Reserve said. This was driven primarily by an 11.6% rise in mortgage debt to $6.2 trillion. The total is up 25% in two years.
Real-estate values rose to $13.9 trillion in the quarter, while stock holdings dropped. Net worth -- total assets minus liabilities -- edged up to $8 trillion but as a percentage of disposable personal income fell to 489% from 495%. That ratio peaked with the stock market three years ago, at 622%.
While U.S. home prices are still rising, the rate of appreciation has slowed to well below the growth in mortgage debt. As a result, owners' equity, while rising in dollar terms, has fallen to 55.2% as a share of the underlying value of the real estate, an all-time low and down almost two percentage points in the last year.
Mortgage borrowing has been driven both by strong sales of new and increasingly expensive homes, as well as by existing homeowners taking out home equity loans or by refinancing into larger mortgages. Such "cash out" refinancing has surged as mortgage rates have hit their lowest on record.
Federal Reserve officials haven't been worried about the rise in mortgage debt, noting some it has replaced costlier consumer installment debt, and part of it reflects a shift from renting to homeownership. Furthermore, because interest rates have dropped, the cost of servicing that debt has remained at about 14% of disposable personal income for three years. While a declining equity share leaves less of a cushion should home values fall sharply, Fed officials consider such a drop unlikely.
There are signs that homeowners are scaling back their debt appetite. While mortgage refinancing has soared to record levels in the last month, "cash-out" refinancings have not kept up, Fed Chairman Alan Greenspan recently said. Furthermore, many borrowers now choose mortgages that amortize in 15 to 20 years instead of 30.
Applications for unemployment benefits climbed 16,000 to 442,000, the Labor Department said, while the less-volatile four-week moving average rose 3,000 to 430,500. A Labor Department statistician said some of the increase may have been due to statistical volatility related to the Memorial Day holiday. Still, for 14 consecutive weeks, applications have topped 400,000 -- a level that economists associate with shrinking employment.
Separately, factory orders fell 2.9% to $319.99 billion in April from March, the U.S. Commerce Department said. A drop in oil prices dragged down the value of orders for petroleum-related products. Orders for durable goods -- those meant to last three or more years, such as cars, personal computers and large household appliances -- fell 2.3%, slightly less than the 2.4% estimate released last week. |
