Homeowners begin to re-prioritize their mortgage payments

April 1st, 2014

Homeowners are once again prioritizing their mortgage bills over their credit card and auto loan debt.

The ill effects of the housing downturn and mortgage crisis left many homeowners sour on the idea of owning property as a fruitful investment, but now consumers are directing more of their capital toward mortgage payments.

A recent report from credit reporting agency TransUnion showed that homeowners are once again paying their home loan bills before their credit cards and auto loans. In September 2008 – a time when the mortgage crisis was in full swing – homeowners prioritized their credit cards over their homes.

“One of the biggest impacts of the Great Recession to the credit system was its influence on consumer payment patterns,” said Ezra Becker, vice president of research and consulting for TransUnion and co-author of the study. “As unemployment rose and home prices cratered, increasingly more consumers were faced with financial constraints and had to make difficult choices – and many chose to value their credit card relationships above their mortgages.”

Becker went on to say that many homeowners had an underwater mortgage, and credit cards offered some liquidity at a time when economic conditions were poor.

Homes are back at the top
TransUnion determined which debt had the highest priority by comparing the past decade’s 30-day delinquency spreads across mortgages, credit cards and auto loans for consumers with all three types of debt. These spreads were then compared with Standard & Poor’s Case-Shiller 20-City Home Price Index. In December 2013, the spread for mortgages dropped from to 1.71 percent, down from 1.79 percent in September the same year and matching the spread seen in September 2007.

Credit card payments also experienced a decline Рfalling from 1.86 percent to 1.83 percent Рbut they still scored higher than home loan bills.

Regional variation
This news is encouraging for consumers who are considering a home purchase, as it indicates that rising equity has given homeowners a positive outlook on their real estate investment. Like the housing recovery at large, the progress seen in some cities has outpaced other metro markets. In Dallas, for example, the shift to prioritizing credit cards did not start until June 2011 and only lasted until September 2012. Miami, on the other hand, shifted in September 2007 and did not revert back until December 2013.

Chicago has been shifted for five-and-a-half years and has yet to revert.

“Markets that experienced extreme housing value increases and declines also saw the biggest shifts in payment dynamics,” Becker said. “As unemployment gradually improves and housing prices recover, we expect every major metropolitan city will revert to the traditional payment.”