Americans are paying more for homes, and the result is showing up in the form of red ink on families’ balance sheets.

  • As home prices rise, American homeowners are accruing more mortgage debt.  
  • Compared to other forms of consumer debt, however, a modest rise in mortgage debt doesn't warrant losing sleep.

Americans are paying more for homes, and the result is showing up in the form of red ink on families’ balance sheets.

The mortgage debt accrued by the average homeowner has risen to $196,014, a 2.5 percent increase over last year and 6.4 percent higher than nine years ago, according to a new study by Experian.

Source: Experian

Mortgage debt is increasing

It’s no surprise that mortgage debt is on the rise.

The median existing-home price in February was $228,400, up 7.7 percent from February 2016 ($212,100).

February’s price increase was the fastest since last January (8.1 percent) and marks the 60th consecutive month of year-over-year gains.

Also, the annualized rate of home sales reached 5.48 million in February from 5.69 million in January, 5.4 percent above a year ago.

More homes sold at higher prices are raising the average mortgage debt.

It’s also not surprising that mortgage debt is greatest where home prices are highest.

Residents of Washington, D.C., had the highest average mortgage debt at $385,000, followed by California ($336,000) and Hawaii ($331,000). It’s no coincidence that these make the top lists of most expensive states (or metros, in the case of Washington, D.C.) to buy a home.

Mortgage debt in perspective

At this point, however, there’s no reason to lose sleep over the increasing level of mortgage debt, for a few reasons.

1. Rising prices are also increasing home equity.

While rising home prices are the culprit behind rising mortgage debt, they are also doing something very beneficial to the other side of homeowners’ balance sheets — raising equity.

At the end of last year, there were 13.9 million U.S. properties that were equity rich, where the combined loan amount secured by the property was 50 percent or less of the property’s estimated market value, an increase of nearly 1.3 million from a year ago.

That’s almost one out of four of all U.S. properties with a mortgage, up from 23.4 percent at the end of Q3 2016 and up from 22.5 percent at the end of 2015.

2. Mortgage debt costs less than credit card debt.

The most expensive form of consumer debt comes from credit cards with revolving balances.

While the average household with credit card debt has balances totaling $16,748, the average household with credit card debt pays a total of $1,292 in credit card interest per year, assuming an annual percentage rate of 18.76 percent.

Mortgages are not revolving and have interest rates that are more than four times lower.

3. It’s harder for consumers to increase mortgage debt than other forms of consumer debt.

Once a homeowner signs a mortgage and makes a 15- or 30-year commitment to a fixed rate mortgage, he or she can change his future mortgage debt by refinancing at some point.

That point won’t be reached until that homeowner has acquired at least 20 percent positive equity.

The illiquidity of mortgage equity acts as a deterrent against homeowners who might use mortgage debt for discretionary spending.

By contrast, consumers with acceptable credit can increase revolving debt with the click of a mouse.

Homeowners better managing mortgage debt

Homeowners are doing a very responsible job of managing their mortgage debt — perhaps the best news of all.

As noted, the only control they have over their mortgage debt occurs when they refinance.

Compared to many owners who refinanced during the housing boom, when many used their home equity like a checking account and then found themselves vulnerable to default when the bubble burst and their home values plummeted, today’s homeowners are more conservative.

While cash-out refinances accounted for nearly half of all refinances in the last quarter of 2016, the most equity drawn in over eight years, borrowers are still tapping equity at less than a third of the rate they were back in 2005, and they’re doing so more prudently.

In fact, the resulting post-cash out, loan-to-value-ratio was 65.6 percent, the lowest on record.

Moreover, homeowners are using their equity to add value to their homes by remodeling or reducing their debt payments by consolidating, rather than on vacations or other discretionary purchases.

There’s evidence that boom and bust changed the way many homeowners think about their mortgage debt.

A national survey by loanDepot last year found that while more than half of the owners in the survey (58 percent) indicated that they have always been conservative about their home equity, 14 percent reported that changes in the housing market over the past 15 years have made them more cautious about touching their equity.

Steve Cook is editor and co-publisher of Real Estate Economy Watch. Visit him on LinkedIn and Facebook.

Email Steve Cook.

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