November 27th, 2007

happytoast power lines

on jeremiah and the bear

In retrospect, it seems self evident: people have too much debt. Chart 1 shows it: from 1985 to today, household debt has risen from 70% of disposable income to 130% of disposable income.

The thing that bothers me, is that I don't really understand exactly what that's saying.

Median income in the US is roughly $50k. Assume that your mortgage payment doesn't exceed 25% of that- a guideline for getting a good rate on a mortgage. This leaves you with about $1k a month for your mortgage payment. At 30 years fixed at 7% interest, $1k a month translates to $150k in mortgage. 20% down means a median house price, to be affordable, is ~$190k. Median house price in 2004 was ~$220k, which means median prices were 15% too expensive that year. OK: but also, assume that housing is 25%, taxes and insurance is 25%, other living expenses 25%, and "disposable income" is 25%. Your total debt is $150k, and your disposable income is $12k, which means household debt for the new purchaser, assuming they behave within reasonable guidelines and have no other debts (ha!) means the ratio is 1200%. Even if housing were your only expense, and the other 75% was "disposable", that ratio would still be 400%.

So, what does it mean when the average household debt has risen from 70% to 130%? It can mean people have been spending beyond their means, or it can mean that there are a greater number of first-time buyers. If the trend is toward a larger percentage of owners, as has been true in recent years, then a larger percentage of people are early on in the cycle. The rising trend could be a scion of excess, or it could be of opportunity. It's likely both: but what do we need to do as a society to favor the latter?

I think the problem is of supply, not demand (I've said this before); and not enough effort is made to supply right-sized, affordable, quality housing.