Most houses are bought with mortgages and interest rates and the availability of mortgage money are key issues for the hoped-for housing recovery. But the links among debts, housing and the economy run much deeper. Debt levels and especially a surge in household debt, such as experienced with mortgages beginning in 2000, played a big part in the housing boom and bust and the subsequent economic downturn. The International Monetary Fund’s World Economic Outlook includes a chapter chronicling the link between debts, the damage associated with paying off – or defaulting – those debts and the severity of the recession. In short, the bigger the surge in household debts to propel the housing boom, the deeper the subsequent housing bust and the nastier the recession. The villain in the recession? we have met the enemy it is our own debt.
The chart shows debt levels for mortgages, non-financial business, financial business and the government as a percentage of GDP over the last 30 or so years. Mortgage debt, measured as percentage of GDP climbed from a bit under half in 2000 to over three-quarters in 2007 before slipping back to 65% in 2011. (Data for the first quarter of 2012 is expected in early June from the Federal Reserve.) Financial sector debt, which includes the impact of mortgages, is also down since 2007 while non-financial business debts are leveling off. Government debt continues to climb.
The IMF analysis also includes cases studies of the US efforts to support home owners and limit foreclosures in the 1930s and again today. The foreclosure crisis of the Great Depression in the 1930s was far worse than today and the response was far larger. Then the government formed the Home Owners Loan Corporation (HOLC) which bought mortgages from banks (in exchange for government-guaranteed bonds) and then re-negotiated terms with home owners. The HOLC bought one million mortgages of which 80% met the revised payment schedules and did not default. This saved 16% of all outstanding mortgages from default. The biggest difference between the 1930s and the 2008 housing bust is probably the political environment. The public pressure for aggressive efforts to relieve household debt problems and prevent defaults was far greater in the 1930s than what we see today amidst worries over the federal government’s deficit, spending and tax policies.