Household debt inched up to another record high in the first quarter even though nonmortgage-related debt drifted lower with a seasonal decrease in credit card balances due in part to tax refunds.

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Housing finance obligations rose, driving total debt up by $18 billion to $18.8 trillion during the period, according to an analysis the Federal Reserve Bank of New York’s Microeconomic Data Center conducts using an anonymized sample of Equifax data.

Mortgage balances were up by $21 billion, bringing the total in that category to $13.9 billion. Home equity lines of credit rose by $12 billion to $446 billion. Declines in the balances of credit cards and some other types of obligations outside the housing sector offset the gains. 

Total delinquencies were generally stable but some mortgage variations shed some light on a recent rule change’s impacts.

Where the mortgage risks are

Overall, serious delinquency transitions for mortgages only “accelerated slightly” from 1.4% to 1.5% during the period, according to the New York Fed’s report. Moves into more short-term arrears drifted lower. 

Pockets of servicing risk lie within the broader delinquency rate, Selma Hepp, chief economist at Cotality, said in an interview at NMN’s offices. She pointed to recent originations in certain markets as well as the FHA rule as reasons for these concerns. 

Servicers with such loans are “constantly worrying about how over leveraged their portfolio is, how much they have to do in modifying these mortgages, how little equity they have; or, if they bought on top of the market, now they’re finding themselves in negative equity,” she said. 

Hepp stressed that overall negative equity, while rising, remains low relative to 2008 levels.

“It’s not a large increase, but it is concentrated, and it’s concentrated in these markets that have seen some price corrections, like Texas and Florida,” she said.

Between these concerns and the broader pickup in long-term arrears noted in the New York Fed’s report, servicers may have to ramp up their resources for dealing with distressed home inventory in certain parts of their portfolios.

“This is something to watch and could lead to a pick up in foreclosures,” Bill McBride wrote in his Calculated Risk blog, commenting on the increase in mortgages’ serious delinquency rate.

The former technology executive’s reports are closely read because was among the first to foresee a housing bubble that forced government-sponsored enterprises Fannie Mae and Freddie Mac into conservatorship in 2008.

These risks are specific to the mortgage market, but there also are some near-term consumer credit concerns outside the market that could have implications for residential real-estate finance.

Other consumer credit concerns

The New York Fed report flags high serious delinquencies in some other sectors like student loans, and a recent Eye on Housing report by the National Association of Home Builders’ economics team also has noted that study reports a 13.2% SDR rate for credit cards.

“Many households increasingly relied on revolving debt to manage higher everyday living costs during the inflation surge and are now struggling to keep up with repayment,” the NAHB economists wrote.

How much and what type of impact this will have on mortgages remains to be seen. It may be contributing to the increase in HELOC debt, which has been ongoing for 16 consecutive quarters.

Credit score distribution supports the notion that mortgage underwriting is doing more to protect the market than it did during the period leading up to the 2008 bubble, with virtually no originations with scores below 620 and “few below 660,” according to McBride. 

However, he noted that there have been more mortgages originated to borrowers with scores of 660 or higher recently.

“There has been an increase in originations for borrowers in the 660 to 670 range. A significant majority of recent originations have been to borrowers with a credit score about 760,” McBride wrote.

While mortgage lenders look at debt-to-income levels and credit scores at origination, the servicing impact that occurs down the road if these worsen may be confirmed fastest for those who encourage borrower communication, particularly for loans with other potential stressors.

“You may not know unless your borrower calls you and claims hardship,” Hepp said.

They say most home sellers are also home buyers.

In other words, they aren’t just selling their property and disappearing into thin air.

Nor are they typically renting either. Often, they are selling one home and purchasing a replacement.

As such, there’s no inventory gain. There is no benefit to the housing market other than churn, which benefits those who get paid for the transaction.

Such as real estate agents, mortgage loan originators, title and escrow companies and so on.

Sellers Don’t Want to Be Buyers Right Now

Here’s the problem.

Given the lack of affordability and dearth of supply at the moment, sellers today don’t want to be buyers (and who can blame them).

Nobody wants to be a buyer right now. It’s tough out there. This is no secret.

As such, existing homeowners, who very likely hold cheap debt, a low loan balance, a low tax basis, and all the other benefits of having bought years ago, are very much “would-be sellers.”

I’ve spoken about this before. Sure, they will sell, but only at the right price.

And chances are that price doesn’t work for many buyers today because affordability is so poor.

To add insult to injury, the existing homeowner’s price must factor in the very real cost of the seller giving up their ultra-low mortgage rate and taking on a much higher rate on an even higher purchase price.

That tricky dynamic puts even more strain on already limited for-sale supply.

We underbuilt for many years post-early 2000s housing crisis, and this simply makes it worse.

It’s why home prices continue to stay stubbornly high despite affordability telling you they should fall.

Today’s Home Sellers Demand Top Dollar to Offset Replacement Property Math

If you’re a home buyer today, you need to look at things from the home seller’s perspective.

Many current homeowners are sitting on 3% 30-year fixed mortgages. Or even sub-3% mortgage rates.

Their monthly payment feels like a steal (and is) compared to what a new buyer would face at today’s rates.

If they sell today and buy again (which as I said most plan to do), they’re not only losing that low-rate mortgage, but also taking on a new loan at rates that are double (or more) than what they currently pay.

In addition, they’re paying a much higher price for their replacement home in a still-competitive market.

The math simply doesn’t pencil for a lot of sellers unless they get top dollar on their current property.

So they list for some exorbitant price and everyone tells them they’re listing way too high.

But they don’t really care. They are happy to stay put if they don’t get their price. They are “would-be sellers” with time on their side.

This allows them to list at an aspirational price and simply bide their time.

Even in normal times, homeowners are emotionally attached to their homes. And due to mortgage rate lock-in, they’re financially anchored as well.

This Is Why Supply Stays Tight and Home Prices Stay Elevated

The end result is pretty straightforward here.

A vicious cycle of limited for-sale inventory, high home prices, and a reluctance for more existing homeowners to sell.

If fewer homes hit the market because owners don’t want to trade in their 3% mortgage and its tiny low balance for a new, much more expensive one, inventory stays tight.

Meanwhile, the few properties that do come to market are priced to compensate the seller for giving up that low rate, low balance, low tax basis, etc.

They need motivation somehow and listing for a fire-sale price ain’t it.

As such, prospective buyers who are already stretched by high interest rates and prices either can’t afford it or choose to wait it out.

Sure, new construction helps to some degree, but it can’t fully offset this strange dynamic, nor are most new builds in areas where folks want to buy (think the outskirts).

Builders face their own challenges today with high costs and tight margins, and they haven’t forgotten the early 2000s housing bust.

So they’re rather smartly not flooding the market with for-sale inventory either.

The end result is sustained high home prices on a national level, even if some markets experience weakness, namely those with a higher concentration of more recent home buyers (those with less to lose by selling or foreclosing).

The irony is that the “right price” for sellers, which is most often a “high price,” keeps the housing market from cracking in a meaningful way.

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on X for hot takes.

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