One of the cities where over-leveraging (taking on too much debt in mortgage) is largely occurring is New York City, according to a recent report from WalletHub, which found NYC has an average mortgage debt of $556,171.
While mortgage rates are currently entering three-year lows despite the Federal Reserve’s December rate hikes that caused hopeful homebuyers (and their agents) slight panic, low monthly payments might coerce buyers into purchasing before the time is right.
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Fear of rising interest rates could push some into locking down 30-year interest rates ahead of planned or recommended schedules, so when things seem good, a slew of buyers purchase ahead of their time and take out larger loans, adding to overleveraging in major metropolitan areas.
[graphiq id=”hBLYKl4NKwl” title=”Mortgage Debt Balance Per Capita in New York” width=”600″ height=”523″ url=”https://w.graphiq.com/w/hBLYKl4NKwl” link=”http://time-series.findthedata.com/l/12644/Mortgage-Debt-Balance-Per-Capita-in-New-York” link_text=”Mortgage Debt Balance Per Capita in New York | FindTheData”]
The mortgage debt-to-income ratio in NYC is a whopping 1,590 percent, and the debt-to-house value ratio is 113 percent. These figures are based on the median home value of $490,700 and the median income of $34,973.
The highest possible WalletHub Home Overleverage Score is 100 points, with NYC coming in at 46.08 points. NYC is in the 99th percentile and among the most over-leveraged cities in the nation.
For comparison, the highest scoring city is Hamtramck, Michigan, with a score of 59.4. While the average mortgage debt in Hamtramck is less at $120,286, the median home value is only $39,800 and the median income is just $18,845, making the debt-to-income ratio 638 percent and the debt-to-house ratio a whopping 302 percent.
WalletHub referenced TransUnion average mortgage debt data from Sept. 2015, divided by the median income and the average mortgage debt divided by the median home value. NYC data and debt figures do not include the surrounding metro cities.
William Wheaton, professor at MIT’s department of economics, said last year was a better time to buy, but 2016 is still opportune for purchasing property.
“Buying ‘at the bottom’ is an opportunity that does not come along often,” he said in a panel discussion with WalletHub.
Yongqiang Chu, assistant professor at University of South Carolina’s Darla Moore School of Business, said that historically low interest rates generally make now a good time to buy, but the numbers still depend on geography.
The biggest mistake and a primary cause of over-leveraging is failure to read the fine print, according to Chu.
“Many mortgages in today’s world offer what’s known as a teaser rate for the first several years, then the rates increase dramatically after that,” he said. “If a home buyer only considers the initial affordability, they may get into big financial trouble later on.”
If you are over-leveraged and have difficulty making monthly mortgage payments, Wheaton recommends applying for HARP (Home Affordable Refinance Program), which is a federal program intended to help underwater and near-underwater homeowners refinance.
Sometimes, however, market conditions are healthy enough for over-leveraged homeowners to be okay as long as they can ride out the storm.
“You could be highly leveraged if the market is very stable, and you are planning to live there for decades — hence the amortization will actually provide you with slow, steady wealth creation,” Wheaton said.
Chu had a different opinion on the matter.
“Before the crisis, people used to think that overleveraging is okay, as long as house prices keep going up,” he said. “But as is evident during the financial crisis, those people paid a huge price for that.”
