A fuller picture of the factors that drove the great U.S. mortgage boom of 2020 is starting to emerge.
The homebuyers who took advantage of rock-bottom mortgage rates during the pandemic included many investors and purchasers of second homes who flocked to the market at levels unseen since before the Great Recession, according to new data from the Federal Reserve Bank of New York.
Cash-out refinancings also hit a post-financial-crisis high, as many households tapped into the equity they have accumulated as home prices have climbed over the last decade. Mortgage origination volume last year totaled $3.7 trillion, by far the highest level since 2003.
The data is most notable for one major contrast that it reveals between the current boom and the previous one: borrowers’ creditworthiness. Last year, roughly 70% of mortgage borrowers had credit scores of 760 or higher, compared with around 30% in 2003.
The 40-percentage-point gap is a reflection of both lenders’ reluctance to extend credit to borrowers with subpar credit and prime borrowers’ confidence in their ability to handle more debt. During the subprime lending boom, many borrowers with little equity took on more debt than they could afford.
“Researchers have concluded that the 2003 refi boom had long-running consequences, contributing to over-leveraged balance sheets as home prices fell,” experts at New York Fed noted in a blog post published Wednesday.
During the fourth quarter, total U.S. household debt outstanding hit an all-time high of $14.56 trillion, according to the report, which was based on a sample of credit data from Equifax.
Many Americans are eschewing public transit for cars during the pandemic, contributing to a boom in auto lending. Car loan originations of $616 billion in 2020 marked a record high.
Credit cards are one consumer lending segment where balances have sharply declined in recent quarters, as banks have tightened their lending criteria and many households have used increased savings and government benefits to pay down existing debt.
Card debt as a share of disposable income fell from around 5.5% to roughly 4.5% in the early months of the pandemic, according to a recent report by the American Bankers Association.
During the fourth quarter, credit card debt outstanding totaled $820 million, down $108 million from the same period a year earlier, the New York Fed found.
The spike in mortgage originations in 2020 was driven mostly by refinancing activity, but loans for home purchases also rose significantly, likely contributing to the recent increase in U.S. home prices. A national index of home prices developed by economists Karl Case and Robert Shiller rose by 9.5% between November 2019 and the same month last year.
In addition to investors, first-time homebuyers also helped fuel demand for mortgages. This group lagged behind repeat purchasers during much of the last decade but has recently caught up, according to the New York Fed’s data.
Still, young adults make up a relatively small portion of the market. In the fourth quarter of last year, adults ages 18 to 29 accounted for 7% of all mortgage originations, down from 11% in the third quarter of 2018, but still up from the low-water mark of 4% in the first quarter of 2013.
While U.S. homeowners withdrew $182 billion in equity last year, the comparable figures from 2003 to 2006 were higher, even without adjusting for inflation, according to the New York Fed researchers. The average amount withdrawn by a homeowner was also significantly lower in 2020 than it had been in 2019.
“The median cashout withdrawal in 2020 was only $6,700,” the researchers wrote, “suggesting that at least half of the refinancers borrowed only enough additional funds to cover the closing costs on the new mortgage.”