Eye On Housing
Over the first quarter of 2018, the value of owners’ equity in real estate expended and hit a new high on a nominal and not seasonally adjusted basis, according to the Financial Accounts of the United States for the first quarter of 2018. This data is published by the Board of Governors of the Federal Reserve System.
On a nominal and not seasonally adjusted basis, households’ owner-occupied real estate increased to $25.1 trillion totally in the first quarter of 2018, $544 billion more than the fourth quarter of 2017 and $1,674 billion more than the first quarter of 2017. The value of owners’ equity in real estate, the difference between the value of owner-occupied real estate and home mortgage debt, rose by $1.4 trillion over the past four quarters and reached $15.0 trillion in the first quarter of 2018.
The blue line and the red line in Figure 1 show the changes in the aggregate market value of households’ real estate and aggregate mortgage debt, respectively; the light blue area presents the change in the ratio of owners’ equity in real estate as a percentage of household real estate from 1987 to the present. The owners’ equity share of home values increased to 59.7% in the first quarter of 2018, from 58.9% in the fourth quarter of 2017.
On the balance sheet of households and nonprofit organizations, home mortgages, the largest share of total household loans, had negative quarterly growth rates between the fourth quarter of 2008 and the first quarter of 2015 in response to the Great Recession, but have risen modestly since then. Over the first quarter of 2018, aggregate home mortgage debt outstanding increased to $10.1 trillion on a not seasonally adjusted basis, $280 billion more than the same period of 2017.
Meanwhile, MBA’s first quarter National Delinquency Report (NDS) shows that the delinquency rate for mortgage loans on one-to-four unit residential properties dropped to a seasonally adjusted rate of 4.63% in the first quarter of 2018, which is an 8 basis point decrease from the same period of 2017. In particular, the serious delinquency rate, the percentage of loans that are 90 days or more past due or in the process of foreclosure, dropped to 1.47% in the first quarter of 2018. The decrease in the serious delinquency rate indicates that the recent changes in mortgage debt outstanding are largely due to the increase in mortgage originations.
According to the New York Fed’s Household Debt and Credit Report, total mortgage origination volume declined by 12.9% from $491.4 billion in the first quarter of 2017 to $427.9 billion in the first quarter of 2018. Figure 2 shows that the share of mortgage originations by credit score has changed over time. Before 2007, among five categories of mortgage originations, the share of mortgage originations with a credit score equal to or exceeding 760 was less than the ones in the 720-759 credit score range, and had shares similar to the ones in the 660-719 credit score range. Meanwhile, over the same period, mortgage originations in the 620-659 credit score range and the ones with a credit score less than 620 accounted for about 9% and 11%, on average.
During the past eleven years, households with the strongest credit score (760+) received the majority of mortgage originations, while the share of mortgage originations for households with a relatively good credit score (720-759) has shrunk. The share of mortgage originations with a credit score equal to or exceeding 760 climbed sharply from 24% in the first quarter of 2007 to 58% in the first quarter of 2018, widening the gap between it and the share of mortgage originations in the 720-759 credit score range.
The analysis indicates that the majority of mortgage originations are obtained by those with the strongest credit scores. At the same time, leverage in the market overall, measured by the loan-to-value ratio, appears to be falling as home values grow faster than mortgage debt. However, on the margin, leverage (the ratio at home purchase) is likely rising. Together it indicates that, on average, those with the strongest credit scores are able to obtain a high amount of mortgage credit relative to the value of their home, and, in addition to house price appreciation, pay down their mortgage debt in a generally timely fashion. More subtly, it suggests that credit tightness restricts those that can get a mortgage, but not the amount that can be obtained given that they obtain one.
Very interesting indeed