Mortgage Originations Slow as Consumer Debt Climbs

July 2, 2018 by Melissa C. Martorella, Esq.

The booming economy failed to boost the mortgage market in May, where a shortage of bottom-end inventory, Fed rate hikes, and high home prices put a damper on mortgage originations. The National Association of Realtors reports that existing home sales have declined during the first four months of this year, compared to a year ago.

During the spring months, sales typically increase, and it is a good indicator of how the housing market is performing overall. During the months of March through June, it is common to see originations of 40% of all annual home sales. However, this year, the Association of Realtors reported that May sales of previously owned homes are down three percent compared to 2017, the second consecutive month of decline.
Economic Growth not Translating into Home Sales
The Atlanta Federal Reserve released a report stating that the U.S. economy should see higher than 4.5% economic growth for the 2nd quarter this year. One would think that the most robust economic growth in a decade would translate into a boom time for real estate. Unemployment is down to 3.8% nationally, and 13 states are experiencing an all-time low in joblessness. Consumer confidence is nearing record highs, and typically a strong economy coupled with positive consumer sentiment bodes well for new home sales. However, so far this year, it hasn’t happened, and sales remain stagnant.
As the economy hums along, we see highs in home prices that we haven’t seen since before the recession. Couple these peak prices with record levels of household debt, and it is placing a strain on first-time house buyers. Young homebuyers, who should be actively seeking out their first homes, instead seem to be putting off their dream of homeownership until they pay down student loans and credit card debt.
Consumer Debt Grows
Mortgage debt is low and remains below pre-recession levels, as home equity continues to grow. Consumers carried 5.5 percent less mortgage debt in the first quarter of 2018 than they did in the third quarter of 2008. However, consumer debt is climbing to levels not seen since before the recession. Consumer debt is now on pace to surpass $1 trillion over that which was held in 2008, before the economic crash. The growth of personal consumer debt is now surpassing mortgage debt as the most significant household debt burden.
During the height of the mortgage boom, consumers’ mortgage debt represented 98% of their disposable income. In the first quarter of 2018, that number stands at 68%, far less than pre-crisis numbers. Consumer credit card debt is up, with both revolving credit card debt and student loans up 45% over 2008, and growing to a total of $4 billion by this December.
Overall household debt has increased, with mortgages and consumer credit headed upwards of $15.7 trillion by the end of this year. That number is one trillion more than consumers held in the 3rd quarter of 2008. Student debt has also increased more than 130% since 2008, and auto loan debt has risen by 39% over the same period.
Net Worth Rising
Overshadowing this rise in consumer debt is household net worth. It hit the $100 trillion mark for the first time in history for the first quarter of 2018, with U.S. household assets gaining over $1.07 trillion.
With home values in some major metropolitan markets growing by more than 80% over the past five years, household net worth growth shows no signs of slowing. However, rate increases, coupled with higher home prices, may dampen the housing market, as first-time homebuyers are being more cautious or being pushed to the sidelines for the time being.
Although rising prices have slowed originations and prevented current owners from “trading up,” the number of new listings in May was 557,000, more than any other month since July 2015. Realtors are hoping that increase in inventory will help boost originations during the summer buying season and translate into higher sales.