The Residential Real Estate Crash Index Message Board

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Strategies & Market Trends : The Residential Real Estate Crash Index

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To: GraceZ who wrote (11460)	7/3/2003 9:45:30 AM
From: MulhollandDrive	Read Replies (1) of 306849

>>You can track just how much was cashout each year going back years and approximate how much consumer debt got rolled in by looking at how far the debt service as a percentage of disposable income has fallen<< you are still missing the point of my question to patron, grace. i was asking about debt service of individual mortgages on a percentage basis the problem as i see it is that when the statistics of debt to equity ratio are taken in the aggregate, the numbers can definitely be skewed. for example....if you have 10 houses on a street and the big estate at the very end of the street is owned by the richest man in town, say his home is worth 10 million and no debt, then the rest of the houses are worth 250K with various levels of debt to equity, my contention is that the 10 million dollar property owned free and clear will skew the debt to ratio numbers dramatically "on that street" and add to that the difficulty in tracking how much short term debt (autos, vacations, household goods, you name it) is now being reclassified as mortgage debt as opposed to consumer debt which makes the consumer appear to be more solvent because the short term debt suddenly disappears there is ( or at least there was <ng>) a good reason for that hideously long mortgage debt application form which asks you to break down your income (and its source) and your debt (and its source) because the concern is your future ability to pay on a monthly basis.. simply put, the lenders are trying to put a hard number on the individuals debt to disposable income level and they go to some length to verify those amounts.... it's part of the due diligence necessary to put a statistical "handle" on risk. but of course we all know that there is no risk in mortgage debt since real estate only goes up. <g> basically my contention is theoretically what you "already showed" wrt debt service as a percentage of disposable income is a "dumb number" i agree with your assertion that consumer debt remains remarkable stable within a narrow percent range because people generally know how much debt they can "handle" and will moderate their consumption (and therefore the assumption of new debt) as the personal debt level tick up beyond the individual's "comfort zone" everyone talked about the wealth effect at the apex of the stock market and how it drove consumption....and now we are talking about the wealth effect of high RE valuations and how yet again, how it helping to hold up the economy... there is an important difference between those two wealth effects...the first came from people checking out their quarterly investment statements and seeing a dollar amount on paper that made them "feel wealthy"... the latter comes from people actually taking on more debt because the house has "appreciated so much" and therefore they feel wealthier. in other words, the cash out re-fi's can become a mechanisim for just more indebtedness....but it all looks fine on a percentage basis in the aggregate because you have that "dumb number" much in the same way automobile purchases are hitting a wall after the artificial stimulation of "free money" via zero percent financing...i think re-fi's will hit a wall as the perception of rates bottoming takes hold. the reason this is relevant is the consumer spending still remains the underpinning for whatever economic "growth" we are seeing ...and therefore if economists are basing forward looking growth projections on a relatively sanguine (dumb, imo) debt to income ratio .....my guess is we will see yet again just how well those economists predict the next recession in this jobless recovery.

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