Hazards of Boom-Time Borrowing
The last recession in the United States ended in November 2001. Since then, labor productivity and business profits have been strong, but wages have barely budged, the personal savings rate has gone negative, and a record share of household income is now spent to pay interest on accumulated debt.
Conventional wisdom holds that the housing boom has made up for those problems. But a recent report from the Federal Reserve indicates otherwise. According to the Fed, rapidly rising home values over the past few years have failed to appreciably increase Americans' net worth because much of the higher value was eaten up by borrowing against home equity.
At the same time, overreliance on a hot housing market — while stoking the economy in the near term — appears to have made Americans more vulnerable to the worst potential effects of a housing slowdown. Those would include crushing debt and rising unemployment as a cooling real estate sector dampens consumer spending and job growth.
The Fed found that between 2001 and 2004, net worth rose by only 1.5 percent for the median family. That was the second worst three-year stretch since the Fed started keeping track in 1989. The worst period, from 1989 to 1992, occurred when the economy was descending into recession. In contrast, the Fed's current report encompasses the Bush-era economic recovery.
As Americans' debt rose, more family income went to paying interest, even as interest rates declined through mid-2004. Families in "the bottom 80 percent of the income distribution" were increasingly afflicted by outsized debt service payments and delinquencies of 60 days or more, the report said.
Since the report was completed, the Fed has doubled interest rates, to 4.5 percent, and more increases are expected. So debt service will not be getting any easier. There are also more signs that the housing market is downshifting. Government and industry numbers released last week show that home sales fell in January while the supply of unsold houses grew and the pace of price increases slowed — events that generally presage a leveling off of prices or even a decline.
For the typical American family, financial well-being now hangs in an uneasy balance between frothy home values on one side and stagnating wages plus rising debt on the other. |
