In recent months, the housing market has revealed contrasting trends between mortgage balances and home equity lines of credit (HELOCs). According to Wolf Richter’s analysis, mortgage balances saw only a modest increase of $71 billion, or 0.57%, in the third quarter of 2023. This growth is the smallest percentage rise since a decline in the previous quarter and indicates a significant slowdown in demand for existing homes, which dropped to its lowest level since 1995. Many potential buyers are opting to rent rather than purchase homes in a market characterized by high prices and elevated mortgage rates. This shift reflects a consumer game of arbitrage, benefiting those who can navigate differing costs between renting and buying. Though mortgage balances have increased year-over-year by 3.8%, the trends show a marked decline from the peaks seen during the housing market frenzy of 2021 and 2022, largely due to increasing interest rates and stagnant home prices.
In stark contrast, HELOC balances have surged significantly, increasing by 1.8% from the previous quarter and 11.9% year-over-year, reaching a total of $387 billion. This jump marks a notable recovery from historical lows, with balances having risen by 22% since the beginning of 2022. With mortgage refinancing becoming less favorable in the current climate of higher rates, homeowners are increasingly turning to HELOCs as a practical alternative. These lines of credit allow homeowners to tap into their home equity without refinancing their entire mortgage, making them attractive for accessing cash at lower interest rates than credit cards, even though HELOC rates currently hover around 10%. While the rise in HELOC balances is significant, they still represent a smaller portion of total mortgage debt compared to levels seen between 2005 and 2012, reflecting a cautious recovery from a prolonged decline.
Homeowners are currently facing a manageable debt burden, with the combined mortgage and HELOC balances amounting to $13 trillion, which increased by 0.60% in the third quarter. In terms of sustainability, disposable incomes—defined as after-tax wages plus various forms of income—are rising even faster than housing debts, resulting in a declining debt-to-income ratio of 59.5%. This decrease is noteworthy considering the debt-to-income ratio had spiked during the housing boom prior to the last financial crisis. Year-on-year, disposable income outpaced housing debt growth, indicating an improving financial landscape for consumers. In contrast to the past housing bust, which exacerbated household debt levels and triggered a financial crisis, today’s situation reflects lower debt burdens relative to household income, alleviating immediate fears about consumer insolvency.
Delinquency rates for both mortgages and HELOCs remain significantly low, with only 0.57% of mortgage balances and 0.36% of HELOCs reported as 90 days or more delinquent. These figures are well below historical norms and reflect a resilient homeowner base bolstered by three years of home price appreciation. Homeowners facing financial difficulties can often sell their properties to pay off debts, maintaining a degree of financial security even during downturns. Unlike the predicaments of the past when tumbling home prices led to widespread defaults, current homeowners are less vulnerable thanks to stabilization in job markets and asset values.
The landscape of foreclosures has also shown improvement since the pandemic, having been kept in check by forbearance programs and foreclosure moratoriums. The number of ongoing foreclosures decreased further to 41,520 in the third quarter of 2023—a notable reduction from previous spikes, and still lower than pre-pandemic levels. The trend has been marked by a “frying-pan pattern,” whereby the expected surges in financial distress do not manifest as they did in prior economic downturns. As homeowners remain hopeful about maintaining their properties and are reluctant to part with them, the fear of a repeat housing crisis seems mitigated for the time being.
Overall, the contrasting trajectories of mortgage and HELOC balances reveal deeper dynamics within the housing market and consumer finance landscape. While demand for traditional mortgages wanes amid high rates and prices, HELOCs have gained traction, allowing homeowners to leverage their equity constructively. The relative health of consumer finances, showcased by a low debt-to-income ratio and stable delinquency rates, provides a buffer against the economic uncertainties that can prompt housing crises. The ongoing changes in borrowing behavior highlight a significant shift in consumer sentiment, influenced by the current economic climate conjured by rising rates and changing housing conditions. As households continue to navigate these shifts, the long-term implications for the housing market and economic indicators remain to be fully explored.