How are US Homes Financed?

A house is a long-lived asset, and there is a different story behind each of the 75 million private houses in the U.S. Because the number of homes is so large, even small problems (in terms of the overall economy) involve millions of homeowners. In this section we will look at the financing of U.S. homes from two perspectives that are both imperfect, but they should at least provide an overview of the picture of the entire home market.

The first perspective comes from the Federal Reserve Flow of Funds Accounts. The Flow of Funds provides a fairly good picture of the overall financial position of the balance sheet of U.S. households, publishing data with a lag of around two months (data for the period ending December 31, 2007 were published on March 6, 2008).

The Flow of Funds tables compiled by the Federal Reserve show that at the end of of 2007 (the fourth quarter data), the value of household real estate was $20,150 billion dollars. These homes have been financed with $10,500 billion mortgages, which means that the owners’ equity is around 48% of the total value (debt is around 52% of the total value). So the average homeowner has a mortgage of a little more than half the value of his property.

The shortcoming of the Flow of Funds data is that in presenting average data, it is difficult to know how many households are having serious problems. So the next data set that we will look at is the American Housing Survey, a publication of the Census Bureau. This survey is far more complete but is published with a much bigger lag; the survey is performed in odd-numbered years and released around a year later. The latest data currently available are for 2005 and data for 2007 should be available later this year.

In the American Housing Survey in Table 3-15, we find that in 2005 about 25 million of the 75 million homes have no mortgage at all, being owned outright by homeowners. The approximately 50 million mortgages have a median principle amount of $92,000 (55% loan to value), interest rate of 6%, with 24 years of payments remaining. The median mortgage was made in 2002 for 29 years.

To better focus on the housing crisis, we will focus on the riskier mortgages. About 10 million mortgages have a loan to value ratio greater than 80%, of which 2.5 million mortgages have a loan to value greater than 100%. This number has certainly increased since the 2005 survey, especially with the recent fall in the prices of some homes.

18 million of the mortgages had been refinanced at some point, 15 million to receive a lower rate. Only 2.5 million mortgages had been refinanced to receive cash, that is paying off a smaller mortgage by taking out a larger mortgage and receiving cash as a result.

The typical US mortgage is a 30-year, fixed rate loan for less than $417,000, a so-called “conforming” loan. In late February of 2008 (the most recent available data), the average loan of this type had a coupon of 5.93%; given the lag between the time that a loan is negotiated and the deal is signed, these rates are associated with loans priced in mid January. The Federal Housing Finance Board (FHFB) reports a large amount of data about the types of loans made here. Loans that were taken out in February were on average $218,000 on homes worth $310,000; 26% of the loans had a loan to price ratio less than 70% and 25% were over 90%; only 8% were adjustable rate mortgages.

Other loans include 15 year fixed-rate loans and adjustable rate loans; jumbo loans (for more than $417,000) are counted separately.  Most loans allow borrowers to refinance without a penalty, meaning that when mortgage interest rates drop there is often a wave of refinancing.

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