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Credit Research Part 2: The Recession and Homeownership

In my last post, I examined the increase in mortgage charge-offs during the Great Recession, and how those rates have mostly returned to pre-recession levels. In this post, I’ll share new research on a key consequence of those increased rates—namely, its impact on homeownership. As you might expect, fewer consumers have mortgages now than before the recession, and the rate at which new mortgages are being opened is still far below what we saw in the boom before the crisis.

In our study, we compared performance across six Metropolitan Statistical Areas (MSAs): New York, San Francisco and Washington DC as examples of areas that endured the recession relatively well, and Las Vegas, Miami and Phoenix as areas that were harder hit by the recession.

The following table shows that the percentage of consumers with at least one mortgage (balance greater than $0) has declined for all six MSAs.

Credit Research 2 Graphic 1

This is an important indicator of homeownership because most consumers need a mortgage to own a home. Indeed, the most recent American Community Survey (2012) by the US Census Bureau indicates that 65.7% of owner-occupied properties have a mortgage.

Comparing 2013 levels in the above chart to the peaks in 2007, we find that the percent of consumers with mortgages declined by 11-14% in New York, San Francisco and Washington, and by 22-24% in Las Vegas, Miami and Phoenix.

It’s notable that Las Vegas started the recession with a larger percentage of residents with a mortgage than San Francisco, but ended with less. This is consistent with our other evidence that Las Vegas was more affected by the recession than San Francisco. Similarly, Miami started with a greater percentage of residents with a mortgage than New York, but after several years of unprecedented foreclosures in Florida, also ended up with fewer consumers with a mortgage.

A good portion of this decline in mortgages can be attributed to homeowners who were foreclosed upon. However, some of this decline is driven by the dual effects of lenders tightening credit criteria in response to the recession, as well as changing consumer preferences for credit, reflected in fewer mortgage applications. The result of these latter two trends is illustrated by the next chart, which shows a marked decline in the rate at which new mortgages were opened after the recession.

Credit Research 2 Graphic 2

It’s important to note that the data available for our analysis does not allow us to distinguish home sales from the refinancing of existing home loans. We do know that interest rates fell to historic lows immediately after the recession, and that there’s been a refinance boom since 2009 as a result. So we can reasonably conclude that much of the new mortgage activity seen in the years after the recession was related to refinancing. Indeed, Freddie Mac data shows that refinancing represented between 60-80% of mortgage applications between 2009 and 2013. The fact that new mortgage openings declined steadily through the recession indicates that the refinance boom wasn’t enough to offset the dramatic drop in home-sale-related mortgages.

You’ll note that the rate of new mortgage openings decreased substantially even prior to the recession. This finding matches the US Census survey of homeownership, which peaked at 69.1% in Q1 2005 and has declined in a fairly linear fashion to 64.8% in Q1 2014. Census data also show that the headship rate (the percentage of adults who head households) has been declining since 2003, indicating that household formation declined in advance of the recession as well. The data is also likely capturing the refinance boom of the early 2000’s, which peaked sharply in 2003 according to the Mortgage Bankers Association’s Refinance Applications Index.

There are, however, signs of recovery. As the chart above shows, the new mortgage rate has begun to increase in the most recent timeframe for four of the six MSAs studied. Interestingly, all three of the harder-hit MSAs are experiencing that rebound.

Of course, we’re not out of the woods. There are lingering effects of the recession that will continue to challenge consumers and lenders—the topic of my next blog post.

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