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Rising home prices have forced consumers to routinely take on higher home mortgage debt, which is set to surpass the amount of borrowing that occurred ten years ago—right before the housing market crash. According to the Federal Reserve, outstanding mortgage debt totaled $10.2 trillion in the second quarter of this year, an increase of 2.7% over the past year. During the easy subprime bubble lending days, the total debt hit $10.7 trillion. In addition, consumers have been taking on increasingly higher non-mortgage debt, as they purchase new cars with borrowed money and pay college tuition with student loans. The growth in these non-mortgage debt areas has been rising at a faster pace of 4.6% from one year ago. In all, the total combined household debt stood at an all-time high of $15.7 trillion.
Should such trends be a source of worry for consumers and for the broader economy? What is the proper perspective? In a growing economy with a rising population, overall borrowing rises. Many need to borrow to buy a car, become a homeowner, start or expand a business, or enroll in college. That is the lifeblood of commercial activity and that is why the overall debt nearly always rises from one year to the next. The only exception to rising debt was from 2009 to 2013, when overall debt remained below the prior year for five consecutive years. Therefore, a recovery in economic activity and recent increases in borrowing should have come as no surprise. What is surprising is that it took 10 long years to get back up to the prior peak levels in debt.
Rather than looking only at one side of the ledger – the debt – we should also take a peek at the other side of the ledger – the asset. The combined net shows a strong household balance sheet. The aggregate mortgage debt outstanding today is roughly the same today as a decade ago, at $10.3 trillion. Yet the aggregate valuation of homes rose from $18.6 trillion to the current $29 trillion. A new high in mortgage debt is not worrisome.
Moreover, the mortgage debt is performing very well with very low default rates. Seriously delinquent mortgages – those that are over 3 months late in payment or are in the foreclosure process – are now at 2.1%. Back in 2009, when the mortgage debt was at similarly high levels, nearly 10% of mortgages were seriously delinquent. It is likely that distressed property home sales are at 3% of all transactions, compared to 36% a decade ago.
The total household debt – mortgage and other borrowings - is also of less concern. Everything that is owned minus everything that is owed of all people combined in the U.S. nearly doubled from $59 trillion in 2009 to $107 trillion as of the second quarter of this year. The stock market is currently getting kneecapped after periods of abnormally high Price-to-Earnings ratios. Even if the stock market were to drop 20% into the bear territory, the net worth of the country is still substantially higher today compared to a decade ago.