The Homeowner Debt Bomb

Will homeowner debt continue to drag the national economy down? Before the residential housing bubble burst, rising home values fueled a high level of consumer spending as homeowners extracted what they thought was equity in their homes for spending purposes.

A new study from Deutsche Bank reports that economists estimated that “homeowners were extracting 25-30% of every dollar of increase in home equity, primarily for consumption.”

As the Deutsche Bank study points out, lower residential values have led to a substantial decline in home equity which fell “43% - $5.9 trillion –  from 2005 (peak) levels to the end of 2008.” What went up has come down.

The result of all of this is that homeowners are “drowning in debt.” The Deutsche Bank (DB) report addresses the issue of “negative equity,” i.e., people who owe more on their home than it is worth. The results aren’t pretty. In the U.S., DB estimates that at the end of the first quarter of this year, “14 million U.S. homeowners had negative equity, or approximately 27% of all homeowners with mortgages. “Moreover, the study estimates “that 25 million homeowners will have negative equity before home prices stabilize, or 48% of all mortgages.” This is a scary figure.

The good news for Texas is that our home price depreciation is much lower than in other areas of the country. For example, Phoenix, Arizona has experienced a 54% decline in residential home value from the peak period to the present, compared to a 10% decline in Dallas.

Still, this latest data, on “underwater” homeowners is bound to be a matter of serious concern to those financial institutions holding these “negative equity” mortgages. The data also suggests that those economists who believe that the American consumer is going to lead us out of this national economic recession, by returning to previously high consumption levels, may be engaged in wishful thinking.

I keep talking and writing about the need for a different approach to economic recovery – one which emphasizes job creation in the private sector. That, to me, is the only sure route to get the American economy growing again.

 

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