Abstract: The level of consumer debt in the US has reached unprecedented levels but that is a sign of a naturally growing, expanding economy and the number of foreclosures in defaulted real estate loans is a natural part of this cycle.
In 2004 warning bells were struck when the Fed released figures which showed that the level of consumer debt in the US, including mortgages, had risen to a staggering $10.5 trillion up from just $7 trillion four years earlier and it did not look like it was going to slow down.
Those who belong to the ‘I told you so’ camp will now point out that the number of foreclosures we are seeing as a result of the failure of the sub-prime mortgage market and lenders’ exposure in that field, is a direct result of this rising mountain of debt. The successive raises in interest which have occurred since that moment have certainly contributed and the temptation here is to see the individual borrower as a microcosm of the lending institutions in reverse, suddenly finding themselves over-exposed in a market where the interest rate hikes successively made it harder and harder for them to make payments.
Ok, reality check guys. Certainly the national level of consumer debt and the fact that it is rising is something to worry about. Certainly the interest rate hikes and consumers’ unwillingness to stop spending have something to do with foreclosures but there would be a heck of a lot more foreclosures around if the level of national debt suddenly reversed and started to shrink.
Why? Simply because debt is driven by the ability of borrowers to borrow which also indicates the health of the economy as a whole. If, for instance, borrowers suddenly lost the ability to fund their borrowing, lending would top, debt would begin to reduce and the market would begin to shrink all of which is entirely bad news for the real estate market and house buying and yes, then we would also see a huge number of foreclosures as lenders would have to take extreme action to recover as much money as they can in order to buttress themselves in a shrinking economy.
This has not yet happened. Foreclosures are rising but compared to the number of new home buyers and the overall number of sub-prime mortgages out there they are a very bearable, if somewhat painful, percentage. As long as there is confidence for borrowers to keep on spending and lenders to keep on lending and provided that borrowers can fund their spending and borrowing then the market will continue to expand, house prices will continue to gain, the mountain of debt will continue to get bigger and foreclosures will continue, in real numbers, to be part of the equation.
It is only when this chain of events is broken that we all need to start getting worried and this has not happened yet.
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