Thursday, August 13, 2015

2015 2Q Household Debt and Credit Report

Source - only updated through q1
The 2Q report is out.  Interestingly, in the second quarter there was a solid jump in mortgage originations, but at the same time, total mortgage debt is declining again, after having stabilized since about 2013.  Total mortgages on consumer credit reports dropped at an annualized rate of almost 3%.

I think we are seeing the confluence of several factors.  Originations are growing, but they are still very low.  They are still below even the temporarily higher levels of 2013.  And, obviously, they are much lower than pre-crisis levels.  So, they are having some positive effect on real estate markets, but nothing we would have called bullish before the country lost its mind about this stuff.

At the same time, we are seeing the long end of the tail of underwater homeowners coming back into positive equity.  We are also seeing the continued recovery of the labor market, which is associated with more churn - more quits and hires.

And, we also have seen an acceleration downward in homeownership in the last few quarters.  I think all of this adds up to a picture where housing and labor markets are finally reaching a full recovery level where frictions have been reduced.  Homeowners who want to move are moving.  Workers who want to test the market are moving to jobs with more opportunity.

But, since so many existing homeowners cannot qualify for mortgages in today's context, these healthy developments have the ironic effect of chilling the single family home market and mortgage credit markets.

I have been preparing for the idea that a bearish market and falling interest rates would be somewhat easy to detect because of apparently predictable signals in the yield curve.  I thought that might happen after mortgages recovered more.  Yet, here we are with long term rates falling, inflation expectations falling, and the Fed signaling that they are tightening...And I can't pull the trigger and go long bonds.  It would just take one meeting, for Yellen to come out and say, "Uncle".  We're backing off.  Don't worry about tightening.  But, we just keep going down this road.  And, it just seems so crazy that this is where we are, I just can't believe that we would take these downside risks.  Surely, they will come to their senses.

Surely, the entire country, at some point, with home ownership at levels literally not seen since the founding of HUD, will forgive ourselves for our imagined sins.  Surely, at some point, we will collectively decide that it's ok to own a house again, that it's ok for bankers to be bankers.  How many years of purgatory have we consigned ourselves to?

I think it is interesting to look at the graph of the distribution of FICO scores and the graph of mortgage originations.  The median FICO score is around 710 to 720.  The median household has been a homeowner for 60 years.  Now, look at the mortgage origination graph.  There is no way that homeownership can remain above 50% without a sharp loosening of credit.

I also think it is interesting to look at the FICO score distributions.  There is surprisingly little variation over time between 2005 and 2013*.  The median score never left that 710-720 range.  I have seen some reasonable discourse on the housing boom that suggested that the reason FICO scores didn't decline as much as the "predatory lender" cause would suggest, on mortgage originations during the boom, is because FICO scores were inflated by rising home values that allowed households to avoid debt problems.  But, the FICO score stability shown here suggests that this could not have been that strong of a factor.

* The source link goes back to 2005.

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