This Week From Law & Reality LIVE
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We are keeping Michiganders informed of the current legal, financial and social issues that we face on a day to day basis. The law is interesting – but it must be viewed in light of reality!
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Is it a Good Thing? – Consumer Spending Declined and Savings Increased
Last month – the economy expanded at an annual rate of 2.3% – slightly off the 3% growth rate for the last 3 quarters of 2017. The major drawback to growth was a 3.3% decline in consumer spending for durable goods. Surprisingly, consumers emboldened with extra cash in their paychecks as a result of the new tax act, elected to cut back on spending, and instead – decreased their spending and increased savings. Those who seek expansion of the economy, job growth and wage increases tout the need for expansion. The drawback, however, is that when expansion occurs from consumer spending fueled by an increase in consumer debt – it is the consumer that must ultimately bear the cost of his own debt burden. From this perspective, for the sake of us “small people” living the day to day task of making a living – I viewed the increase in savings and decline is spending as a favorable event.
Unfortunately, my take is this is temporary. To give you a flavor for the consume market, discover reported that its credit card balances increased 10% in the first quarter from a year earlier. Another sobering statistic was also revealed this month in the Wall Street Journal (April 10, 2018) as to how far home buyers are stretching their budgets to purchase homes:
Roughly one in five conventional mortgage loans made this winter went to borrowers spending more than 45% of their monthly incomes on their mortgage payment and other debts, the highest proportion since the housing crisis, according to new data from mortgage-data tracker CoreLogic Inc. That was almost triple the proportion of such loans made in 2016 and the first half of 2017, CoreLogic said.
This ratio combined with increasing credit card debt is not a good sign. When the economy fell apart in 2008, just under 37% of homeowners had debt to income ratios in the 46% to 50% range. Last summer, Fannie Mae and Freddie Mac increased the ratio they would back loans from 45% to 50%. In 2004-2005, leading up to the bubble (which burst) the number of home loans funded in the 45% – 50% range was in the 25% range – approximately the same as present. The increase to 37% – which pumped the bubble to burst – occurred between 2004 – 2007. If you combine the increase in credit card debt, the willingness of banks to extend credit card debt and Fannie Mae and Freddie Mac’s willingness to back loans with up to 50% debt to income ratios – I think the future is self-evident – and not good.
The prospect of a bubble burst in the housing market coupled with excessive debt is worrisome. It does not mean you need to panic or necessarily hold back from moving into home ownership. It does, however, mean that you need to investigate the matter more carefully and make sure you have a “back up plan.” By that I mean, you should have a contingency plan in place right to know that you can implement in that situation. To do so, you need to understand the parameters and options that are available to you. On a simple note, the old adage of buying low and selling high still apply. Right now, it is challenging to buy low. So, if you’re going forward and buying high – you need to be sure you have the plan in place that will allow you to whether the storm if another recession tanks home prices. We did learn from the last recession, that most (but not all) home market values return – though it takes time.
Bottom line – be smart and think through your moves. By all means, resist the credit card debt – and if you have it, take action to get rid of it. To learn your options – attend our upcoming FREE Seminar on May 9th – Freedom Means Being Debt Free. Details are below.
Enjoy the tide that has turned with Old Person Weather!
P.S. P.S. CORRECTION FROM LAST WEEK’s BLAST –- If you happened to have read last week’s blast – Some People Don’t Know How to Take a Compliment – the fancy car that looked like a Sebring – was a Bentley – not a Maserati!