by D. Cupples | A recent Federal Reserve Board report indicates that credit-card debt "rose at an 11.3 percent annual rate in November after rising at an 8.5 percent rate in October." From 2003-2005, credit-card debt rose between 2 and 4 percent. The Center for Economic and Policy Research (CEPR) reports:
"The explanation for this surge in credit card debt is that millions of homeowners are losing the ability to borrow against their home. In the last Flow of Funds release, the Fed reported that the ratio of homeowners’ equity to value stood at just 50.4 percent, down from 54.2 percent at the end of 2005, and 57.3 percent at the end of 2001. The ratio will almost certainly cross below 50 percent for the first time in history when the fourth quarter data is reported." (CEPR)
In other words, when housing prices were artificially inflated, people had higher equity in their homes -- and many of them borrowed against it. Now that prices are coming back down to earth, they're losing equity against which to borrow money. The CEPR continues:
"More than one-third of homeowners have completely paid off their mortgages and many others are close to having them paid off. This means that a large number of homeowners have little or no equity in their home. These people are now running up credit card debt at near record rates.... Millions of households will soon have little choice but to sharply curtail their consumption.
"The latest Case-Shiller indexes... showed that house prices in the aggregate index were dropping at an annual rate of 11.7 percent in the three months from July to October. At this pace, households will lose more than $2.2 trillion in housing wealth over the next year." (CEPR)
In Las Vegas, San Diego and Miami, housing prices have dropped between 18% and 22%.
As Americans' spending slows down, so to will income for many businesses -- which could ultimately lead to layoffs. None of this adds up to a pretty picture.
Another thing is happening, according to the CEPR. As housing prices return to earth, people are starting to find that they will owe more on their mortgages than their houses are really worth -- even people who had Alt-A and prime mortgages. What's the logical choice for these people? To default.
Given news like this, how can any of us ordinary folks believe some politicians' and pundits' insistence that our nation's economy is strong?
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