Residential mortgages totaled $9.4 trillion as of June 30 and overall consumer debt reached an all-time high of $13.86 trillion, according to the Federal Reserve Bank of New York. Residential mortgage debt eclipsed the 2008 peak of $9.29 trillion, fueling the belief among some market watchers that a housing crash apocalypse they’ve been counting on since the Great Recession is imminent. Diving below the headlines, however, the data shows we haven’t yet entered a back-to-the-future moment akin to the 2008 mortgage bubble: That’s because not all debt is created equal.
There are definitely troubling consumer debt trends we must acknowledge. First are student loans. While decreasing by $8 billion this quarter, student loan debt still stood at $1.48 trillion, or roughly 11% of total consumer debt, a significantly greater share than in 2008. Furthermore, auto loans represent a greater portion of consumer debt than they did eleven years ago, thanks to unprecedented low interest rates.
‘The elephant in the room’
And now for the elephant in the room—mortgage debt. Mortgage debt remains the largest percentage of consumer debt, tracking at 68% of the total. Even so, this portion has decreased significantly from a peak of 73% before the Great Recession. Mortgage debt is down primarily because home ownership is down. Saddled with student loans and a lagging supply of new entry-level homes, only 64% of Americans own their own residences, down four points from 2008.
…the data shows we haven’t yet entered a back-to-the-future moment akin to the 2008 mortgage bubble: That’s because not all debt is created equal.
Meanwhile, those who can afford homes must meet much higher credit standards than before, a consequence of the prior housing crash as lenders increased their due diligence on potential borrowers.
The vast majority of today’s mortgage applicants have credit scores above 760, translating to very strong mortgage portfolios for banks. Between April 1 and June 30, just 1% of mortgage balances were delinquent by 90 days or more, and only 66,000 individuals were foreclosed upon, according to their credit reports, both historical lows.
The use of credit is high as debt continues to fund the American Dream of a college education, a nice car and a comfortable house. However, tighter underwriting standards and improved creditworthiness of borrowers will ensure that housing debt won’t cause the next recession anytime soon.
