Why Does Mortgage Debt Continue to Rise Among Older Homeowners?

by George Masnick
Senior Research Fellow

According to the Federal Reserve Bank of New York, aggregate mortgage debt stood at $8.6 trillion in Q2 2014, down from its peak of $10.0 trillion in Q3 2008. Many have interpreted this decline as a sign that consumers have become chastened by the Great Recession’s bursting of the housing bubble and are voluntarily paying down their mortgage debt to more sustainable levels. For those thinking in such terms, I recommend a paper further analyzing the same Consumer Credit Panel data that produces the aggregate debt estimates just cited. In a masterful exercise, Fed economist Neil Bhutta concludes that the recent drop in mortgage debt has more to do with shrinking inflows than with expanding outflows, including mortgage defaults:

"While few borrowers, compared to prior years, have been increasing their mortgage debt, they also do not appear to be aggressively paying down their mortgages… It is therefore possible that many borrowers might actually be credit constrained (they would like to increase their debt, but cannot find a willing lender …).” (p. 3)

A critical limitation of the Fed’s Consumer Credit Panel data is that it includes very limited demographic information (only the age of the borrower). But Bhutta’s findings are supported by a recently released Census Bureau report on the growing wealth inequality in the U.S. that reports on trends in mortgage debt broken down by a wide variety of household demographic characteristics. These data, collected by the Survey of Income and Program Participation (SIPP), clearly show a post-Great Recession decline in the share of young households with home debt (Figure 1) – consistent with a dramatic slowing of movement into first-time homeownership. At the same time, the report also shows that the percentage of older households with home debt has continued to increase. Since 2000, the share of homeowners aged 65-69 with home debt increased by almost 33 percent, and the share of those aged 70-74 increased by almost 65 percent. This trend is consistent with today’s older owners failing to pay down their mortgages as diligently as did earlier generations. Both equity extractions to garner cash to pay for other expenditures, and simple refinancing and extending the payment period to lower monthly payment costs will slow the pace at which homeowners pay off their mortgages.

Source: Census Bureau tabulations of Survey of Income and Program Participation (SIPP) data

Moreover, among those households with home debt, overall median debt outstanding has continued to increase post-Great Recession, albeit at a diminished pace (Figure 2). The increase in median home debt is especially true among the elderly. Median outstanding home debt for homeowners aged 65-69 with a mortgage increased by 46 percent between 2000 and 2005, and another 8 percent between 2005 and 2011. The corresponding figures for 70-74 year old owners with home debt are 18 and 33 percent. This doesn’t necessarily indicate a recent rise in refinancing activity among these older households. Rather it likely is attributable to the aging of 60-64 and 65-69 year olds (with higher mortgage debt from the previous periods) into the 65-69 and 70-74 age groups.

Source: Census Bureau tabulations of Survey of Income and Program Participation (SIPP) data

Growing mortgage debt among the elderly is troubling. Declining income later in life is inevitable for most households. With mortgage payments a continuing part of the monthly household budget, in addition to real estate taxes and the expense of home repairs, many elderly with high housing cost burdens will need to postpone retirement or spend less on other needs like food or health care. Fewer will be able to draw on wealth accumulated through growth in home equity to help pay the bills late in life. Some will let their homes fall into disrepair or will be forced to sell their homes when they would prefer to age in place. This is a trend worth our continuing attention and concern.