Shrinking Mortgage Debt is Good News for the Housing Market

Back in 2008, Americans in general are $12.68 trillion in debt outstanding, 79% of that debt is comprised of housing debt. Just recently, the total debt went down to $12.2 trillion in the fourth quarter of 2015, dropping the share of housing debt to 72%, or $8.74 trillion in total. There was an increase of cash- out refinances and credit from home equity lines of more than $300 billion from 2003 up until 2007. This increase in housing debt only grew by $30 billion, which is a huge difference from the data that was gathered years before.

One of the main reasons why there was a huge decline in mortgage debt during the last quarter of 2015 is because Americans aren’t taking their house’s equity if compared to the previous decade. People are offsetting the amount of cash- out refinancing by repaying their HELOCs and second mortgages. There was also a slow pace of house buying, mostly because Americans are paying down their current home loans.

A great difference of 7% from 2008’s 79% debt outstanding to a 72% debt outstanding at the end of 2015 is a good sign of a steady rising economy in the United States. One of the key contributors to the higher pace of debt decline is the consistency with the credit standards. Most of the approved new mortgages in every state such as Texas, are granted to people with excellent credit standing, which means that they are able to pay on time. People who pay bills on time are given lower rates as well. Although the mortgage payments have fallen 8%, the principal has then increased to 41% from 2008 up until today.

According to New York Fed researchers, the shrinking of mortgage debt is actually a good sign. Paying- off their mortgages would mean a huge savings for the borrowers, which in turn strengthens the balance sheets for lenders alike.  However, a continuous decrease of debt in real estate property alone may offset the balance and may result to an unhealthy plummet of those properties. If in case the other factors that consist the debt outstanding of Americans will not go down, the real estate market in cities like Dallas might suffer a huge drop from its market price.

It just goes to show that focusing on paying off mortgages affects more than just the homebuyers alone, but the whole economy as well. It is greatly advised for people, not just homeowners alone, to keep up with their bills and mortgages to slowly have themselves taken out of debt. Managing one’s expenses, saving a portion of their income to pay a little extra for their mortgage can greatly help lessen the mortgage length and thus having their home loans paid off earlier than expected.