Housing Market Leverage

The most important line item for consumer liabilities is home mortgages because it’s the biggest segment. As you can see from the chart below, the home mortgage liabilities as a percentage of disposable income have followed the homeownership rate downwards following the 2008 recession.

Liabilities To Disposable Income

This is unusual because recessions are supposed to be when deleveraging events occur, while leveraging usually occurs during expansions. As an aside, deleveraging is why some people call recessions healthy. However, there are two dimensions to every story. When recessions destroy bad debts, with it, the assets of the counterparty experience a similar fate, since every debt is someones asset. It would be great if individuals or companies never obtained bad debt in the first place, but it takes two parties to make the mistake, not just one.

The conclusion some people draw from this improvement in the deleveraging of mortgages as a function of household disposable income for the consumer’s balance sheet is that the expansion is just getting started. They say that the economy has many more years of growth for the liabilities to increase. That’s a misleading narrative because it implies the consumer leverage, when looking at real estate, will get as high as the last peak, which lead to the 2008 financial crisis. The liabilities to disposable income ratio is not likely to reach the previous peak during this business cycle because for most of America the 2008 financial crisis is still a painful memory. Additionally, there are new regulations on housing loans, whereby banks have raised their lending standards and borrowers don’t want to repeat the same mistakes again especially since over a million home mortgages are still underwater. This is not to say that certain city level housing markets aren’t in a bubble or that housing has become affordable for many, however as a whole, the real estate market is much healthier than it was leading up to 2008.