By Alison Rice. Between their new houses, mortgage refinancings, and shiny new SUVs, free-spending consumers saved the U.S. economy from a far deeper downturn last fall.
But now those spendy ways are causing a wee bit of concern. According to David Wyss, chief economist for Standard and Poor's (S & P) in New York, Americans' debt-service burden is approaching the high levels of 1986, with 14.3 percent of households' after-tax income going toward mortgage and consumer debt payments.
Part of that increase is positive--"Debt is rising because homeownership is rising," Wyss notes--but not all of it. "Some of it is a little bit dangerous, because people are leveraging more than they used to," he says.
That's particularly true for home purchases, where low interest rates, tax deductions, and low down payment products have made high loan-to-value mortgages more appealing to consumers. (In high loan-to-value mortgages, lenders provide more than 80 percent of the financing.)
But they are riskier, both for lenders and consumers. If home prices soften, "that equity will disappear," says Norm Williams, regional economist in the FDIC's Boston office. More troublesome for builders: High loan-to-purchase price ratios are increasingly common in hot markets such as Phoenix and Las Vegas. "The overall mortgage market is strong," Williams says, "but there are some areas around the edge that bear watching, such as high loan-to-value lending in areas that have seen rapid price appreciation that outpaced the fundamentals."
In other words, beware the bubble.
There are some trouble spots. Nearly 11 percent of FHA borrowers were more than 30 days late at 2001's end, compared to 3 percent for conventional loans, according to the Mortgage Bankers Association. Credit card charge offs also hit 7.6 percent in March 2002, according to the S and P data.
What will be the numbers to watch? First, unemployment, which affects consumer confidence. The jobless rate did rise slightly in April, but at 6 percent, it remains low by historical standards.
The other issue is interest rates. "Clearly, it's a problem," Wyss says of consumer debt load. "Those are some nasty numbers on the credit cards, but as long as interest rates stay low and the recession is mild, it's not a major problem."
Others suggest that household debt is no longer a worry, given the economy's apparent recovery. "When the economy goes into recession, household debt compounds the downside," says David Seiders, chief economist for the NAHB. "We're past the downside. We're now on the upside."