I got the idea for this blog after reading an article in The Wall Street Journal called the “Second-Mortgage Misery“.  The article cites statistics from the Federal Reserve Board data showing homeowners took out a total of $2.69 trillion between 2004 and 2006 at the height of the housing boom. Corelogic Inc. a source cited in the same article showed that 38% of those who borrowed against their home-equity are upside on their loan values at an average of $83,000 in negative equity. By contrast 18% of those who did NOT borrowed against their home-equity are upside down on their homes’ value at an average of $52,000.  And 40% of the cash borrowed is said to have been used to pay for everything from vacations to medical bills.  The article even cited an individual taking $200,000 home-equity loan to pay for his divorce settlement. “To each its own” but some of this spending was borderline irresponsible.

I just find it incredibly iconic when I hear the public speak so boldly about the current administration’s spending.  It’s like the “Pot calling the kettle black”.  Believe me, I understand the fundamental difference between government spending and consumer spending.  I do know consumers can do what we want with their money. The article is evidence of it. The government on the other hand can’t so to speak. The irony here is our consumer spending has been excessive. What can I say? — Wow! $2.69 trillion in second mortgages in two years, that is a huge amount of debt, $83,000-$52,000 in negative equity places too much pressure on home values. For those who don’t understand how we got here.  Easy access to credit gave way to everyone credit worthy or NOT to buy homes.  Consequently, you get this kind of artificial demand for housing and two things happened our existing home values went up hence the $2.69 trillion in second mortgages borrowed, and builders had to build new homes which led to massive foreclosures and the loss in property value after the economy tanked.

Those homeowner’s figures do not even include credit card debt, student loans, automobile loans, etc.  So, when we add those in the debt grows to $13.5 trillion or so.  This is extremely critical because you need income (money from jobs) and a strong economy to sustain this crazy spending.  If the average American household debt is roughly $117-000-$120,000, and the average household income for a single earner $44,000-$52,000 and for a dual earner is a little over $67.000. This is a recipe for disaster.  You are spending money you don’t have and your and your family’s livelihoods are hanging by thread (the one or two jobs in the household) in a contracting economy.   Things get a little tougher because American’s only save 6%-%7 of their paychecks.  So we are going to struggle for a while longer.  You can’t undo over a decade of crazy spending in 3-4 years especially with high unemployment and a soft economy.

Now, not all the news is bad, the housing debt has fallen by 1.5%-2% in the last couple of years and that’s an improvement since 1945.  And it appears Americans are getting the austerity message, credit card balances are also decreasing.   The only way out of this mess is to keep reducing your debt, control your spending and build up your savings eventually.  My objective for this blog was to sort of put spending in perspective because it does not matter whether it is consumer spending or government spending; too much spending usually has the same negative consequences. One fundamental difference between the two is the government can print money and raise the debt ceiling and we (the consumer) can’t.  So, the next time you hear about spending in general and you hear about the gloomy state of real estate and the economy.  If you can identify with this blog and the article you may be the only one to blame for your own spending. If you didn’t get a second mortgage, and you didn’t run up your credit all you have to deal with is the loss in property value. You have options, you can have the property taxes reassessed to lower the taxes, and you can pay more to reduce your mortgage faster. Ultimately, as the real estate market improves so will the value of your home. I hope the information is worth to you…


 

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