November 1, 2014

Small Business Home Mortgage Borrowing Remains Historically High

The fraction of small business borrowing that comes from home mortgage loans has declined since the end of the housing boom. However, small business owners will need to further wean themselves from home equity as a source of business credit before home mortgage-based small business finance returns to pre-housing boom levels, Federal Reserve data reveal.

The figure below shows data small business home mortgage borrowing, taken from the Federal Reserve’s Financial Accounts of the United States, a quarterly data release of the central bank, which provides information on the borrowing, saving, production, and consumption of households, businesses and government entities in the country. The figure shows the amount of outstanding home mortgage loans at nonfinancial noncorporate businesses – a measure of companies organized as sole proprietorships and partnerships, and the Federal Reserve’s proxy for small businesses – as a percentage of total liabilities at these companies as well as the amount of home mortgage debt outstanding at the average nonfinancial noncorporate business measured in inflation-adjusted terms.

When the housing prices peaked in 2006 and began their six year slide, they triggered a shift away from home mortgages as a source of financing for small businesses. The value of home mortgage loans outstanding declined from 11.6 percent of total liabilities of nonfinancial noncorporate businesses to 8.2 percent between 2006 and 2013. Moreover, the average dollar value home mortgage borrowing at nonfinancial noncorporate businesses decreased from $24,000 to $18,000 in 2010 dollars over the same period.

However, the figure also shows that home mortgage debt as a share of nonfinancial noncorporate business liabilities and the average level of home mortgage borrowing outstanding at these businesses both rose considerably in the 1990s. Between 1993 and 2002, the average nonfinancial noncorporate business increased its holdings of home mortgage debt two-and-a-half-fold in inflation-adjusted terms, from $8,400 (in 2010 dollars) to $22,100 (in 2010 dollars). During the same period, the fraction of these businesses’ liabilities coming from home mortgages nearly doubled, from 6.8 percent to 11.6 percent.

Whether small business use of home mortgage debt will decline further is an open question. But both the level and share of liabilities remain high relative to pre-housing boom levels. From 1980 until 1997 – when the unprecedented rise in U.S. housing prices began – home mortgage debt averaged 6.4 percent of the liabilities of nonfinancial noncorporate businesses, and the average nonfinancial noncorporate business held $9,600 worth of real home mortgage debt.

Home mortgage reliance

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Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

3 Reactions

  1. Now if we could just get banks to begin lending to small businesses these entrepreneurs could stop risking their homes just to fund their businesses.

  2. This is very true and I totally agree with you.I think Payday loans can also be a good options for business start ups.

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