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Consumer debt decreased by 0.5% nationwide in the second quarter (2Q) of 2012. Much of this reduction is due to decreased mortgage balances. This overall decrease is achieved through the continued high numbers of short sales and foreclosure sales.

Non-mortgage debt actually increased by 0.4% in 2Q 2012. The increase came from consumers taking out more auto loans and student loan debt, a good sign a recovery is underway.

California had the highest average debt balance per person of any state,$70,000 per capita. In contrast, the national average was $47,000 per capita. Most of this difference is in mortgage debt due to California’s high home prices achieved and lost during the Millennium Boom.

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29% of households in California (2 million homes) are over-encumbered by underwater mortgage debt. Therefore, taking on even more debt is simply unthinkable (if not impossible) for these overburdened homeowners. Not good for the recovery of the California economy.

Californians are deleveraging mortgage debt more quickly than the rest of the nation. California managed to shed 6.5% of its mortgage debt this year. The rest of the nation managed only a 4% decrease.

But this deleveraging is not the sign of a healthy amortization or long-term shift in prices. Homeowners are either losing or walking away from their homes. The excess debt is lost with the home. As a result, the homeownership rate is in serious decline.

Related article:

Understanding California’s homeownership rate

California’s homeownership rate is the lowest in the nation – currently at 54.7%. As it continues to drop, settling around 51% by 2017, renting will become more common. Agents can shift their business to include rentals to ensure success in the coming years.

Re: Quarterly Report on Household Debt and Credit from the Federal Reserve Bank of New York