Friday, August 11, 2017

Americans are Again Taking on Huge Debts, Which Didn't End Well Last Time



U.S. housing inventory hit a record low this year and the trend in tightness shows no sign of abating.

The inventory of homes for sale was down more than 11 percent in June, year over year, according to Zillow, with steeper drops in big markets like San Francisco (minus 26 percent), Minneapolis-St. Paul (down 30 percent), Washington, D.C. (down 20 percent) and Seattle (minus 24 percent).

Remarkably, housing inventory experienced a year-over-year decline for the 104th consecutive month, dating back to October 2008, according to RE/MAX.

Homebuilders haven’t picked up the slack by constructing more homes. Though housing starts have increased dramatically from the crash-era bottom, they’re still below average. In short, building hasn’t caught up with demand yet, which has kept supply painfully low.

“There are about as many homes for sale now as there were in 1994, except there are about 63 million more people in this country now than there were then,” reports Svenja Gudell, chief economist at Zillow.

That has driven home prices to record highs. The June 2017 Median Sales Price of $245,000 was the highest in the history of the RE/MAX National Housing report.

Unless supply rises quickly and dramatically, or unless demand suddenly falls due to lack of affordability, expect the housing crunch to continue.

Though median household income rose to $56,516 in 2015 (the latest data available), according to the U.S. Census Bureau, it remains 1.6 percent lower than in 2000, when it hit $57,790, and 2.4 percent below the 1999 peak at $57,909.

However, homes were much less expensive back then. The median U.S. home value was $119,600 in 2000, according to the U.S. Census Bureau. Because homes are far less affordable today, relative to incomes, it will lead to more defaults and foreclosures in the next, inevitable, recession.

This isn’t the only evidence that Americans are living beyond their means.

Credit-card debt in the U.S. rose again in June, surpassing the peak set just before the 2008 financial crisis.

Outstanding revolving credit, which includes credit-card debt, rose to $1.02 trillion in June, according to a monthly report from the Federal Reserve.

This has consequences; defaults are once again on the rise. The New York Federal Reserve observed a 7.5 percent rise in the share of credit-card balances that were seriously delinquent, or at least 90 days past due, in the first quarter.

Mortgage debt ($14.4 trillion), credit card debt $1 trillion), student loan debt ($1.4 trillion) and auto debt ($1.2 trillion) have all piled up to record levels. Consequently, U.S. household debt surpassed its pre-crisis peak in the first quarter. Total household debt increased to $12.73 trillion, surpassing the previous record level seen in 2008.

If you’re looking for a ray of light in this story, it might be that household income is now higher than in 2008. However, it still remains lower than in 1999 and 2000. That’s not good news.

Another positive view: in the fourth quarter of 2007, when many of us realized that the wheels were coming off the wagon, Americans were devoting 13 percent of their disposable personal income to household debt service. By the first quarter of 2017, that percentage was 10 percent.

Maybe that means that everything ok and Americans have it all under control.

But there’s no escaping the fact that wages have been very sluggish, rising just 2.5 percent over the past year. Wages typically grow by 3.5 percent to 4 percent when the unemployment rate is this low

However, inflation has also been sluggish, remaining below the Federal Reserve’s 2 percent target for five years. In fact, the Consumer Price Index rose just 1.7 percent, year-over-year, in July.

So, though wages have remained weak, inflation has remained even weaker.

Yet, the CPI is misleading. Things such as college tuition, prescription drugs and home prices are all far above the overall inflation rate. For example:

* Tuition at four-year public colleges has risen 225 percent over the past 20 years, according to College Board data. Student loan debt has now risen to $1.4 trillion.

* From about mid-2015 to mid-2016, prescription drug costs jumped by nearly 10 percent. Furthermore, according to an AARP study, the price for an AARP-selected basket of widely used prescription drugs rose from $4,140 in 2005 to $11,341 in 2013, an average annual increase of 13.4 percent and a total jump of 174 percent.

* The median U.S. home value rose 96 percent from 2000 - 2016, according to the U.S. Census Bureau, meaning it roughly doubled over 17 years. That’s an average annual increase of 4.1 percent, well above the inflation rate.

Though consumers may have seen modest increases for consumer goods, such as clothing and footwear, the bulk of our money is spent on much more expensive items, such as housing, tuition, prescription drugs, health insurance and healthcare. None of those things have undergone modest price increases.

The heavily inflated costs of these components are creating enormous and unhealthy debt levels. Record-high debts should be seen as a canary in the coal mine.

The last time debt levels were this high, it didn’t end well. In fact, we’re still grappling with the aftermath a decade later.

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