Home Equity Debt Soars
by David Myron, American Demographics
Overdependence on home equity loans and lines of credit have
economists
concerned that consumers are financially over-extended and ready to cut
back on
spending.
Too many costs are gnawing away at consumers' wallets, and while the
job
market has improved over the past year, wages have not kept up with the
cost of
living.
To combat a significant jump in inflation, in 2000, the Federal
Reserve
started reducing interest rates, which eventually reached record lows in
recent
years. Still, the very strategy that economic regulators used to avert
economic
calamity and encourage consumer spending has encouraged consumers to go
more
into debt, argues Richard Hastings, an analyst at New York-based Bernard
Sands,
a retail market advisory firm. "We are now in an inflationary cycle,"
Hastings
warns. "It really is a very serious issue."
He maintains that home equity debt levels are soaring. Additionally,
he's
concerned that Americans are not only taking advantage of the low
interest rates
to participate in the ubiquitous American dream of owning a home, but to
eliminate high-interest credit card debts. On the surface, transferring
high-interest credit card debts to low-interest home equity loans
appears
beneficial. However, according to Hastings, as home equity loans and
lines of
credit often enable consumers to borrow up to 10 percent of the value of
their
home, they are effectively increasing their borrowing power and debt
levels.
Supporting his claim, he points to the increasing home equity growth
rate in
the U.S.. By the first quarter of 2003, home equity loan growth outpaced
credit
card growth by an average of 5.6 percentage points. By the same quarter
in 2004,
that figure jumped to 8.4 percent. What's more, U.S. home equity debt
was at a
record high of $415 billion for the second quarter ending June 30 , a 10
percent
jump over the previous quarter, the FDIC reports. If home equity debt
keeps
increasing at current levels, it's on pace to break $500 billion by the
end of
the year. This is particularly disturbing to Hastings, as home equity
debt was
only about $125 billion in March 2000.
"It's out of control. If wages don't grow, and I believe they will
not grow
enough, and if the overall global economy slows down, and that might
happen,
this [home equity debt] will be hanging over the household sector to an
enormous
degree." So enormous, he adds, that much like the stock market bubble
burst of
the late '90s there could be a home equity bubble burst.
Already, Gen Xers have taken on debt levels that are 78 percent
higher than
their Boomer parents' debt, almost all of which is due to the high cost
of
housing, says James Chung, president of Boston-based Reach Advisors, a
market
research and consulting firm. "Xers didn't buy in before the run up in
real
estate, and [as of two years ago] their housing debt was 62 percent
higher than
Boomers at the same life-stage," Chung says. "It's more expensive to be
an Xer
at this point in life."
And Xers may be paving a similar path for Gen Y. According to the
National
Association of Realtors NAR , a significant increase in home-buying is
already
occurring among Gen Ys. The NAR reports that from 2001 to 2003, the
number of
buyers under age 25 purchasing their first home jumped 20.2 percent to
345,000
from 287,000.
"Echo Boomers are going into their peak years for buying a first
home. That's
going to be a big factor going forward," says Walter Molony, spokesman
for the
NAR. Considering this generation's large size 72 million nears that of
Boomers
76 million , Molony expects the housing inventory balance to be skewed
toward
sellers. And, in 2005 the NAR forecasts a 4.6 percent rise in U.S. real
estate
prices.
Hastings expects investments in real estate and the subsequent home
equity
loans and lines of credit to hurt holiday spending. He estimates that
the total
retail spending on non-durables and durables will grow by approximately
1.5
percentage points less in 2004 than it did in 2003. He also expects
chain store
"comparable" store sales during the 2004 holiday season will grow by
approximately 2.5 percent to 3.5 percent, compared with the 4.5 percent
growth
rate in the previous holiday season.
Posted on November 1, 2004
Copyright (C) Demographics Alert: The Trends Newsweekly, 2004.
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