Boom Results in Record U.S. Home Loan Debt

Americans have more of their income tied up in mortgage payments than any time in the past 16 years, according to the U.K. Financial Times.

This reflects the recent surge in home prices and increases in mortgage rates throughout the United States. A study published by the Joint Center for Housing Studies at Harvard Univ. argues that housing will continue to become harder to afford, even as prices start to slow.

The median U.S. household now spends 23 percent of its income on mortgage payments, a level not reached since July 1990, according to the National Association of Realtors. The problem of affordability is especially acute for low-income families, where high prices and a decline in building of rental properties are causing problems.

Almost half of American households with the lowest 20 percent of earnings spent more than half of their income on housing costs, which include both mortgages and rent. Over the past year, wage rises have been struggling to keep pace with the rising cost of living, and as more money goes towards housing, there is less left over for other needs.

Overall, the number of households paying more than half of their income on housing costs was 15.8 million, an increase of more than two million from 2001-2004. The number of households with moderate cost burdens (defined as those in which inhabitants pay more than 30 percent of income to housing) jumped from 31.3 million to 35 million over that time.

“The fact that the housing market is slowing in many areas will probably not make it easier for many Americans to get on the housing ladder, since rising interest rates should offset any benefit,” said Nicolas Retsinas, director of the Joint Center for Housing Studies.

At the early stages of the U.S. housing boom, especially in Florida, rising prices were balanced by falling Florida home loan rates, which for the most part kept affordability stable. Recently, hoever, rates have been climbing by nearly a full percent in 12 months, while house prices continue to push higher, or at least seem hesitant to decline.

“If aspiring homeowners are increasingly finding prices beyond their reach, this should have a ripple effect through the market, making it harder for people to sell their home,” said Nigel Gault, Director of U.S. Economics at Global Insight, a consulting firm.

• The Harvard study showed that affordability problems were increasingly hitting middle-income families, who earn $22,500-75,700 annually.
• The number of these families paying more than 50 percent of their income on housing rose by 700,000 to 3.1 million from 2001-2004.

Building for rental units fell last year, according to the Harvard study, as both builders and property owners sought to cash in on the spectacular rise in prices. Builders broke ground on just 203,000 housing units last year, a drop of 22,000 from the previous year. But a Realtors spokesman said that affordability was a ways way from a crisis point.

“We saw much worse levels of affordability in the 1980s, but clearly things are going in the wrong direction. There are still many areas in the U.S. where housing is extremely affordable but the problems are more acute in states like California and Florida,” said Walt Maloney.

The Harvard study illustrates that the growing problem of affordability has been worsened by restrictions on residential development and the growth of low-wage, part-time employment. Despite the growing financial strain on homeowners, the study argued that the Florida housing market was set for a long period of stagnation, rather than a crash.

“Although housing prices are stretched, it is hard to see the catalyst for a crisis in the market… The overvaluation looks pretty well balanced by longer-term supports for house prices, so we may just see a few years with little action. Houses will revert to being something to live in rather than money makers,” the study states.

To bridge the gap between sluggish earnings growth and speedy house price growth, more Americans are turning to non-traditional and/or longer-term home loans.

More than a third of loans last year were at adjustable rates that may, in the near future, backfire on their holders if interest rates continue to climb. Even scarier are the 10 percent of buyers last year who opted for interest-only or payment-option mortgages, which do not require payment of the full premium, or in some cases interest, costs.

The good news is that relatively few owners are likely to suffer from what is known as negative amortization even in the unlikely event that rising interest rates or unemployment drove up foreclosures. About 94 percent of homeowners have home equity built up of 10 percent or more.