The 14 Most Maxed-Out Metros for Housing Debt

by John Egan, LawnStarter.com,  November 21, 2016

Living in paradise comes at a hefty price.

In the Honolulu, HI, metro area, the median sale price of an existing single-family home was $745,300 in the third quarter of 2016, according to the National Association Realtors. Behind the San Jose, CA, and San Francisco, CA, metro areas, Honolulu was the third most expensive home market in the U.S. during that period. By comparison, the national median sale price in the third quarter was $249,000, the association says.

Not surprisingly, Hawaii has the third highest average mortgage debt in the U.S. — $262,825 — according to figures reported by Bankrate.com. That figure puts Hawaii behind only two other places: the District of Columbia and California. Hawaii’s mortgage debt is 60 percent higher than the national average.

Maxed Out in Honolulu

The high cost of housing in Honolulu helps explain why it’s the most maxed-out metro for housing debt among the 100 most populous metro areas.

A LawnStarter analysis of U.S. Census Bureau data shows nearly 23 percent of mortgaged owner-occupied homes in the Honolulu metro area had a second mortgage or a home equity loan in 2015. That’s the highest percentage among the top 100 metros. The Census Bureau data was released in 2016.

In and of themselves, second mortgages and home equity loans (another type of second mortgage) aren’t evil. But they do carry financial risks.

“By taking out a second mortgage, you are adding to your overall debt burden. Anytime you add on to your overall debt burden, you make yourself more vulnerable in case you then experience financial difficulties that affect your ability to repay your debts,” the federal Consumer Financial Protection Bureau says. “It is important to know that a major risk with home equity loans or home equity lines of credit is that if you cannot repay a home equity loan or home equity line of credit, you could potentially lose your home because you are using the equity in your home as collateral.”

The 80-15-5 Formula

Cathy Lee, 2016 president of the Hawaii Association of Mortgage Brokers, says most home buyers in the Honolulu area don’t have enough money for a 20 percent down payment, which would enable them to avoid paying private mortgage insurance (PMI). To work around that, she says, most Honolulu home buyers use what’s known as the 80-15-5 formula — 85 percent for a first mortgage, 15 percent for a second mortgage and 5 percent for a down payment. This way, the need for PMI can be skirted.

The embrace of this so-called “piggyback” loan method underscores the hurdles faced by home buyers in Honolulu.

“We must build homes that Hawaii’s working families can afford — not luxury condominiums for out-of-state speculators,” Hawaii Gov. David Ige said when he was running for the post in 2014.

Of course, some homeowners in the Honolulu area do take out second mortgages to pay off debt, undertake home improvements or cover college expenses, Lee says, rather than just to avoid PMI.

Cost-of-Living Concerns

Lee notes that most homeowners in the Honolulu area hold down more than one job to make ends meet, as residents of the area pay much more for housing, food, clothing and other essentials than their mainland counterparts do. Honolulu’s cost of living is the fourth highest among major North American cities, according to cost-of-living data from Expatistan.

“Cost of living is hard to fix. Hawaii is the most isolated community on the planet, and everything costs more,” Ige told the Hawaii Economic Association in 2015.

With Honolulu claiming the top spot, here’s our ranking of the 14 Most Maxed-Out Metros for Housing Debt.

#1 Honolulu:

Owner-occupied homes with mortgage: 112,055

Mortgaged owner-occupied homes with second mortgage or home equity loan: 25,668

Percentage of mortgaged owner-occupied homes with second mortgage or home equity loan: 22.91%

read … Maxed Out