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on jeremiah and the bear [Nov. 27th, 2007|08:44 am]

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.

[User Picture]From: hbergeronx
2007-11-27 11:41 pm (UTC)
so what if the savings rate is negative?

People have "realized" that money market funds/ passbook savings are a terrible way to invest long term, and are drawing that down to put it in equity. That's why, afaik, the savings rate is negative, since stocks, mutual funds, property, and 401k's aren't savings, by official definition.

Problem is, is that those money market funds are pretty much a necessity for writing mortgages.
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