Publication: Progressive Review
Credit Card Debt Soars as House Prices Plunge | |
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THE PROGRESSIVE REVIEW - January 10, 2008
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Credit Card Debt Soars as House Prices Plunge
By Dean Baker
The Center for Economic and Policy Research
"The current rate of house price decline will destroy
$2.2 trillion of wealth this year."
The Federal Reserve Board reported yesterday that credit
card debt rose at an 11.3 percent annual rate in November
after rising at an 8.5 percent rate in October. By
comparison, credit card debt rose at a rate between
2 percent and 4 percent from 2003 to 2005.
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.
This is a remarkably rapid decline, especially since the
soaring home prices of recent years translated dollar for
dollar into additional equity.
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This aggregate number conceals vast differences among home-
owners. 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. Of course, credit card debt cannot offset the
ability to borrow against home equity for long. Total out-
standing credit debt is less than $940 billion; mortgage
debt was increasing at a $730 billion annual rate in the
third quarter. Millions of households will soon have little
choice but to sharply curtail their consumption.
The latest Case-Shiller indexes, which received little
attention because they were released on December 26th,
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. Some of the really big losers in the latest
data were Las Vegas, where house prices were falling at an
18.9 percent annual rate over the last three months, San
Diego, where they declined at a 20.3 percent rate, and
Miami where they dropped at a 22.0 percent rate.
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Many homeowners in these formerly hot markets put little or
nothing down when they purchased homes in the last two or
three years. As a result, a large percentage of recent
homebuyers will soon find themselves with negative equity.
This is the reason that the foreclosure crisis is spreading
from the subprime segment of the mortgage market to the
Alt-A and prime segment. Homeowners who find themselves
owing more than the value of their home have enormous
incentive to default.
The pending home sales data for November are somewhat
better than most analysts had expected. While they are
down slightly from the October levels, the latter were
revised up to show a gain of 3.7 percent from September
instead of 0.6 percent. The improvement from the August-
September trough is concentrated in the West, where sales
have risen by almost 8 percent from the lows hit in the
summer. This probably is due more to the extraordinary
weakness of the summer sales levels (down almost 40 percent
from 2005) than to any real upturn in the market.
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The mortgage applications index continues to give erratic
readings, jumping 32 percent from last week's seasonally
adjusted measure. The recent mortgage application data is
hard to interpret for two reasons. First, the subprime
segment of the mortgage market is underrepresented in the
Mortgage Bankers Association (MBA), which constructs the
index. This means that the index will not fully capture
some of the falloff in subprime loans. Also, as borrowers
switch from defunct subprime lenders to MBA members, it
will appear in the index as an increase in lending. The
other problem with this data is that a far higher portion
of applications are turned down now that a year ago. Even
with these factors inflating the index, the four-week
average for the purchase index was just 397.9. It had
been over 500 at its peaks in 2005.
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