Miami Homeowners and Americans nationwide are slowly but surely digging themselves out of mortgage debt.
Home equity in the first quarter of this year increased to $6.7 trillion, the highest level since 2008, as homeowners taking advantage of record-low borrowing costs to refinance their loans brought cash to the table to reduce principal.
Based on an analysis by Bloomberg of Federal Reserve, the 7.3% gain was the biggest jump in over 60 years.
It’s the strongest sign that we’ve seen to date that Americans’ home-loan debt burden is starting to ease after the record borrowing that created, and then ultimately popped, the housing bubble, leaving close to a quarter of homeowners with mortgages owing more than their properties were worth, said Richard DeKaser, deputy chief economist at Boston-based Parthenon Group, LLC.
According to Freddie Mac, the government-owned mortgage buyer, half the mortgages refinanced in the fourth quarter reduced loan size, which is a record.
The willingness of homeowners to carry housing debt has radically shifted, said DeKaser, former chairman of the American Bankers Association’s Economic Advisory Committee. When the market was doing really well, a mortgage was used as a leveraging tool, and now it’s seen as a risk, he added.
Measured as a share versus dollars, homeowner equity was 41% of U.S. residential property value in the first quarter, including homeowners who don’t have mortgages, based on the Fed study released in early June. The last time it was that high was in the third quarter of 2008 when it was 43%.
Homeowners were too overleveraged in the boom years, and that left them with excess debt when the bubble burst, said Paul Miller, a managing director with FBR Capital Markets in Arlington, VA. Now, people are trying to put themselves back on solid ground, he added.
According to Fed data, residential mortgage debt peaked in 2007 at $10.6 trillion, doubling in six years. Since then, it has fallen 7% as the value of all residential property has dropped 23%.
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Homeowners aren’t just bringing money to the table when they refinance their mortgages. Many are also opting to shorten the term of their loans, which increases their monthly payments. The average mortgage term dropped to 27 years in March and April from 29 years in February.
The majority of U.S. mortgages have either 15-year or 30-year terms. When the average drops, it shows that more homeowners are choosing the shorter period.
The average rate for a 30-year fixed mortgage has tumbled since early 2011 to 3.71% in mid-June, rising from the previous week’s record-low of 3.67%. Meanwhile, refinancing applications are at a three-year high.
DeKaser attributes the mortgage debt reduction to the “fear factor.” A dim recovery that still has one of every 15 people unemployed has convinced some borrowers that they need to be thriftier, he said.
Homeowners are worried about dropping home prices, and they’re concerned about the economy, DeKaser added. As a result, many people are choosing to pay down their mortgages versus buying things, because then they sleep better at night, he continued.
According to the S&P/Case-Shiller price index of 20 U.S. metropolitan areas, home prices tumbled for six straight months through March to the lowest level in 10 years, 35% below the peak prices of the housing boom.
A 3.4% increase in home sales last month could indicate that prices are starting to stabilize, according to Eric Belsky, managing director of Harvard University’s Joint Center for Housing Studies.
Miami Homeowners can learn about options for mortgages or refinance by contacting Miami Realtor Allan Kleer .