I don’t generally like situations where “the jokes just write themselves.”
Those types of conjunctures make everyone sound like a gifted satirist. One of my former employers made a career out of telling obvious jokes about the economy in an (ultimately successful) bid to make market participants believe he was clever. What he lacked in real analytical skills and writing ability he more than compensated for with a kind of relatable bitterness towards… well, towards anyone and everything, really.
To the delight of those looking to traffic in unimaginative punchlines, the New York Fed’s quarterly household debt and credit report, out Tuesday, served up a veritable smorgasbord of cheap zinger opportunities.
To be sure, it’s no surprise that household debt rose rapidly in the second quarter. After all, Americans have been herded into buying a highly levered asset at extraordinarily elevated prices. And there you go, there’s some ready-made, sarcastic derision already.
Mortgage balances, the largest household debt component, jumped by more than a quarter-trillion during the period (figure below), the Fed said Tuesday. And they (the Fed) should know. There’s another obvious joke.
Apparently, nearly half of America’s entire mortgage stock was originated over the past 12 months alone. Originations and refis were $1.2 trillion in the second quarter.
The Fed’s growing presence in the MBS market (figure below) has been variously derided for exacerbating the inexorable rise in home prices. The Case-Shiller index posted a 16.6% gain in May, the latest data showed, another record going back to 1988. Craig Lazzara, global head of index investment strategy at S&P Dow Jones Indices, admitted to being “out of superlatives.”
Joelle Scally, Administrator of the Center for Microeconomic Data at the NY Fed, called the pace of originations “very robust.”
Scally added a caveat: “However, there are still two million borrowers in mortgage forbearance who are vulnerable to financial distress once the forbearance programs come to an end.”
In the second quarter, roughly 8,100 people had a new foreclosure notation added to their credit reports. That was the lowest figure ever in data back to 1999 — and it’s not even close (figure below). As The NY Fed noted, “foreclosures [are] effectively on legal hold due to [the] CARES Act and other restrictions.”
The share of mortgage balances 90+ days past due dropped to just 0.5%.
Bloomberg wrote that “the US housing market has been so hot that many homeowners have higher levels of equity even though they’ve borrowed more.” Reverse that equation and you’ll have an idea what might happen down the road, when home prices (almost) invariably fall from current levels.
71% of the $1.22 trillion in newly-originated mortgage debt in Q2 went to borrowers with credit scores over 760. The figure (below) shows the median.
More than a year on from the pandemic, I’d argue it’s still mostly impossible to get anything like a “clean” read on overall household debt dynamics in the US. The NY Fed alluded to that.
“Aggregate delinquency rates across all debt products continued to decline since the beginning of the pandemic recession, reflecting an uptake in forbearances provided by both the CARES Act and voluntarily offered by lenders,” the color accompanying the release said. “As of late June, the share of outstanding debt that was in some stage of delinquency was 2 percentage points lower than the fourth quarter of 2019, just before the COVID pandemic hit the US.”
That’s a testament to the “simulated” nature of the world’s largest economy. This time last year, the US suffered its largest contraction in recorded history. 12 months later, delinquent debt is lower than it was before the collapse.
You can slice and dice the data any way you like. At the 30,000-foot level, aggregate balances increased 2.1%, the biggest jump since Q4 2013 (figure below).
The nominal increase was the biggest since Q2 2007.
How many lazy punchlines can you squeeze out of that?
Here, I’ll lend you one: “On the bright side, hyperinflation is a great way to de-leverage.”
As much as I would like to join the bubble parade I cannot. This price increase in housing was 12 years in the making. Prices lagged, as did housing starts. And the demographics are favorable too. Can I envision prices flat for 4 years? Sure. A price collapse? Nope.
Don’t jinx it for me. I have my eyes on two properties I want to buy once prices fall 20%.
Although I’d have to live in one of them, and if I’m being honest, I doubt I’ll have the heart to leave the island.
Great read as usual. I am not concerned if household debt is increasing mainly thanks to banks originating more mortgages. Real estate value should keep pace with inflation and so long as most home owners do not abuse home equity lines of credit to buy crap, mortgage debt should be about the best kind of debt US homes can have in this environment. I refinanced my main property recently and have a home equity line tagged to the Fed’s rate (so it’s not going up any time soon), making lower payments in a depreciating currency to a bank while my real asset increases in nominal value is as good as capitalism can get in my opinion. If household debt was increasing because of credit card or student debt then I would be feeling the tingles of fear. Anyway, as soon as mortgage forbearance expires I plan to look for a second home as an investment, no mortgage this time though, I’ll pay for that sucker with debased fiat which I will get from selling crypto (a digital asset!), unless Warren and Gensler really spoil the party before then, in which case I might sell my over valued home and move to tropical El Salvador.
I hope those houses are on a hill on the island what with the sea level rising and storms getting worse (more tidal surge). Maybe don’t be in a rush to buy just yet.
The problem with living in just one house all 12 months of the year, no matter how beautiful the view, (assuming one has excess cash), is that it is very difficult to find a place with an ideal climate during all 12 months. Too damp/rainy, too hot/humid, or too cold/gray are the main culprits during a too significant portion of the year.
If one can easily take some money out of the market and buy additional homes, it might be a better way to enjoy wealth (vs. looking at a number on a screen representing one’s wealth).
Hopefully, the sum total of the additional home(s), along with the original home, provide a great climate to live in year round. Moving from home to home, for a few months at a time is very feasible for the “work from home” crowd- especially if one home is in a no income tax state – where one might be able to establish a “primary domicile” for state income tax purposes.
I still say “no debt” as a hedge to one who might have a bit of “key man risk” related to their income stream.
Here is the zinger- if any/all of those homes are in a sought-after vacation location, and one has a place to lock up some personal possessions, one can rent out the home when they aren’t using it, to cover fixed costs. If you are willing to give up 25-40% of the rental income, one can find a good agent to deal with all of that. It might not be great to leave homes empty for extended periods anyway.