Housing News

What the Current State of Household Debt Tells Us

Constricted savings mean worse spending patterns for the real estate market.

You may have heard of the drastic changes in the economy that the recession has brought about but this report from CNNMoney.com can speak more of bigger havoc. It states, “The Federal Reserve said household net worth, which is the difference between assets and liabilities, sunk by $5.1 trillion in the fourth quarter to $51.5 trillion. It was the sixth straight quarterly decline from the peak of $64.4 trillion in the second quarter of 2007. Meanwhile, homeowner equity decreased to 43% of their household real estate by the end of 2008. That compared to 48.8% at the end of 2007 and 58.5% in 2005.”

It adds, “The Fed said household debt in the fourth quarter contracted at an annual rate of 2%, marking the first quarter that debt has shrunk. Household debt fell by $69.7 billion to $13.8 trillion dollars in the fourth quarter. The government initially reported that household debt contracted by 0.8% in the third quarter, but that reading was revised to a 0.2% gain.”

Has this affected the mortgage market during the fourth quarter of last year?

First, home values have something to do with the impact. The S&P/Case-Shiller U.S. National Home Price Index reports that the 4Q08 rate declined by 18.2 percent YoY. Since home values plunged, home equity has naturally taken a downturn too. And as we know it, the lower the home equity, the harder it is for homeowners to keep up with home improvements and other expenses. It could also mean that they will not have enough money when they retire. Worse, they’d have a harder time getting home equity loans or HELOC.

Second, since unemployment or underemployment can obviously bring down finances, monthly payments are the first to get a cut. We’ve found this press release from the Mortgage Bankers Association that pointed out how joblessness contributed to the delinquency and foreclosure rates in 4Q08. The delinquency rate for mortgage loans on one-to-four-unit residential properties increased to 7.88 percent, up by 286 basis points YoY. The delinquency rate includes loans that are at least one payment past due but does not include loans somewhere in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the same period was 3.30 percent, up by 126 basis points YoY. This explains how household debt has impacted the real estate market evidenced by delinquencies and foreclosures.

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