Why Today’s Mortgage Debt Isn’t a Sign of a Housing Market Crash

Why Today’s Mortgage Debt Isn’t a Sign of a Housing Market Crash

One major reason a foreclosure crisis isn’t looming is the substantial equity homeowners have today. Unlike the last housing bubble, where many owed more than their homes were worth, today’s homeowners hold significantly more equity than debt.

That’s why, even though mortgage debt has reached an all-time high, this isn’t a repeat of 2008. As Bill McBride, Housing Analyst for Calculated Risk, explains:

“With the recent house price increases, some people are worried about a new housing bubble – but mortgage debt isn’t a concern . . .”

Today’s homeowners are in a much stronger financial position than ever before. Let’s break it down to understand why today’s mortgage debt isn’t cause for concern.

More Equity, Less Risk of Foreclosures

The St. Louis Fed reports that total homeowner equity is nearly three times the total mortgage debt today, highlighting the strong financial position of homeowners (see graph below):

High equity significantly reduces the chances of foreclosure for homeowners. If financial challenges arise, they can often sell their property and still benefit from the equity they've accumulated.  

Even in the case of a potential dip in home values, most homeowners today have enough equity to provide a financial cushion. This situation is vastly different from the 2008 crisis, where many homeowners owed more on their mortgages than their homes were worth, leaving them with limited options to prevent foreclosure.

Delinquency Rates Are Still Near Historic Lows

Another reassuring sign is that, according to the NY Fed, mortgage delinquencies—specifically payments that are over 90 days late—remain near historic lows (see graph below).  

This stability highlights the strong financial position of homeowners today and reinforces why the current market conditions are significantly different from those during the 2008 housing crisis.

This is largely due to various programs aimed at assisting homeowners during temporary financial challenges. Marina Walsh, Vice President of Industry Analysis at the Mortgage Bankers Association (MBA), explains that these relief options, offered by both government and private sectors, have been instrumental in maintaining low foreclosure rates even during tough economic times.

“. . . servicers are helping at-risk homeowners avoid foreclosures through loan workout options that can mitigate temporary distress.”

This means that even if homeowners experience payment difficulties, there are support systems available to help them steer clear of foreclosure.

Low Unemployment Helps Keep the Market Stable

Another key element is the current low unemployment rate. With more people in stable jobs, homeowners are in a better position to manage their mortgage payments. As Archana Pradhan, Principal Economist at CoreLogic, puts it:

“Low unemployment numbers have helped reduce the overall delinquency rate . . .”

During the previous housing crisis, unemployment rates were much higher, contributing to a surge in foreclosures. However, today’s unemployment rate is significantly lower, as shown in the graph below:

This stability in employment is one of the key reasons the market today doesn’t face the same risks it did during the 2008 crisis.

Unlike the last downturn, we aren’t likely to see a wave of distressed sales. Most homeowners now have steady jobs and low-interest mortgages they can manage, making it easier for them to keep up with their payments. As McBride puts it:

“The bottom line is there will not be a huge wave of distressed sales as happened following the housing bubble.” 

Bottom Line

Although mortgage debt is at a high point, there's no need to fear another market crash. In fact, most homeowners are in a solid financial position. If you have any questions or concerns, feel free to reach out so we can discuss.