Americans’ mortgage debt is steadily reducing

CLARKONOMICS: The Bureau of Economic Analysis (BEA) shows that our mortgage balances have declined steadily and significantly from where we were at the peak of the bubble.

If you think back to mid last decade, people thought their houses were ATM machines. They did repeated cash-out refinances, one after the other. I also remember getting calls about “125s,” where the lender would lend you 125% the value of your home.

The great news is that Americans are reversing course and steadily reducing how much they owe per month.

The mortgage interest we pay now equals a little over 5% of the nation’s after-tax income, according the BEA numbers. In addition, the BEA says you have to go back to the 1980s or early 1990s to find a time when we devoted so little of our after-tax income to service mortgage interest.

Meanwhile, USA Today reports the average interest rate on mortgages has fallen for 16 consecutive quarters, and rates are the lowest they’ve been since those records started being kept.

So we’re in a situation where there’s a perfect storm for today’s homebuyer: Home values have declined meaning buyers need smaller loans; buyers are coming to the table with more down-payment; and interest rates are low. That all sets the table for a real recovery in housing.

Now, I don’t know the day, month or year of the recovery. But the important thing is that the fundamentals are now in place, instead of the smoke and mirrors of the shell game we played for so long in America. That booming economy of so long ago was a false economy based on speculation and borrowed money.

Today, that very same housing market is having the opposite effect and creating a drag on our economy. This is a very painful but necessary step to get to economic health. And the level of debt and cost of servicing that debt it is a key measure of that health.