credit cards

More Americans pay mortgage first again, then credit cards

September 19, 2013: 10:20 AM ET

More good news for the housing market, as people now prioritize the mortgage bill ahead of car loan and credit cards.

home affordabilityFORTUNE -- In another sign the U.S. housing market is recovering, financially distressed borrowers are starting to make their mortgage payments before their credit cards bills -- a near reversal of a trend that emerged after the housing market crashed.

It's a positive development, reflecting the rebound in U.S. home prices and fewer borrowers stuck with mortgages worth more than their homes, according to a study released Thursday by Transunion, a Chicago-based credit information provider. As home values rebound, borrowers have a bigger incentive to pay their monthly mortgages on time.

They've long paid their auto loans first, followed by their mortgages and credit cards. That pattern changed during the housing downturn, as many cash-strapped and jobless borrowers valued their credit cards more than their homes. Researchers say the switch had a lot to do with collapse of the housing market, but it's also important to note that laws protecting homeowners were also a factor. Whereas a bank could repossess your car in a matter of days or months, it could take months or even years before your home is repossessed.

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The traditional payment pattern has not yet fully recovered, but data shows its getting close.

In 2009, credit cards were 30 days delinquent at a rate of 2.82% vs. a higher rate of 3.83% for mortgages, according to Transunion's study, which looked at payment patterns between January 2008 to December 2012, when home prices boomed and then went bust. That rate has fallen over the years -- in 2012, charge cards were about a month delinquent at a rate of 1.82% while mortgages weren't that much different at 1.91%.

The reversal is tied to the steady rise in home prices, researchers of the study say. When in 2009 the Standard and Poor's Case-Shiller home price index of 20 major cities fell by 34.46%, the mortgage-credit card delinquency spread was 0.42%. But as the index rose by 9.53% in December 2012, the delinquency spread fell to 0.10%.

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The rise in U.S. home prices has slowed in recent months, as borrowers face rising interest rates. If Transunion is right and payment patterns are largely tied to home prices, a full recovery could take longer if rates continue going up.

But that could also change, since U.S. Federal Chairman Ben Bernanke on Wednesday announced the central bank would leave its stimulus program in place. The 10-year Treasury note, closely tied to mortgage rates, plunged to 2.71% after the announcement, down from 2.9% earlier that day. If this helps home prices, a full recovery could happen sooner than later.

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