Reply #28: Households: Worst Financial Shape Since WWII

[Roland99]

http://agonist.org/households_worst_financial_shape_since_wwii

It’s been awhile since I have written about the issue of consumer debt. Please don’t take this as a sign that consumer debt in the US is not an issue anymore. Far from it – the consumer debt issue is still alive and well. In fact, it’s reaching historic levels – as in levels not seen since WWII levels. Paul Kasriel of Northern Trust has done some digging into the most recent Federal Reserve’s Flow of Funds report and found some pretty scary developments. The report is available in PDF format here, under the title Festivus Flow-of-Funds Stocking Stuffers. I would encourage everyone to download this report. The excerpts below reference some of the charts in the report.

Also – a big thanks to the Big Picture economic blog for highlighting this report.

Despite the fact that household mortgage borrowing has slowed in recent quarters, the leverage in owner-occupied real estate reached a record high 46.4% in the third quarter of 2006, as shown in chart 8. If mortgage borrowing slowed, why the increase in leverage? Because, as shown in chart 9, there has been a sharp slowdown in the growth of the total market value of residential read estate. With a still sizeable excess inventory of homes for sale, continued weak growth, perhaps even a contraction, in the market value of residential real estate could reasonably be expected in 2007.

While all of this may sound a bit complicated, it’s really simple when you rephrase the eco-geek language with everyday English. All Mr. Kasriel is doing is to compare the total outstanding household mortgage debt with total household real estate holdings. This is the leverage ratio, and economists or financial people use this ratio to determine if a household has enough assets to cover all its liabilities. For comparison purposes, let’s use the first three quarters of 2005 from the Fed’s Flow of Funds report. Total household residential real estate holdings increased from $17.6 trillion in the first quarter of 2005 to $18.9 trillion in the third quarter of 2005 – or an increase of 7.38%. For the same quarters in 2006, residential real estate increased from 19.9 trillion to 20.5 trillion or an increase of 3%. In other words, residential real estates’ upward appreciation for the first three quarters of 2006 was half the rate as the first three quarters of 2005. Because real estate is slowing in appreciation, the incredibly high amount of outstanding mortgage debt at the national level – 9.5 trillion in the third quarter of 2006 – takes a larger percentage of the value of real estate. Just as importantly, residential real estate now comprises the largest percentage of household assets since 1955.

Conversely, homeowner’s equity – which represents the amount a person actually owns in real estate –- is at a post WWII record low.

I loves me some Bush Doctrine economy!!