In all the frenzy over first-half of 2003 economic data -- and all the soothsaying it's inspired about whether the American economy is going to go up or stay down -- one salient fact has been left out: Household debt.
Two out of every three American families now own the homes they live in -- or, more accurately, they share ownership with a bank. And these houses are just about the only assets whose value has been rising since the recession began. Sowith record-low mortgage rates and rising home values, millions of Americans have been doing the logical thing: They've been refinancing their homes and pulling out cash.
And this extra cash has come in mighty handy. Even though wages are going nowhere, jobs continue to disappear at an alarming rate, and the President's tax cuts are putting only a few hundred dollars in the pockets of the typical household, home refinancings have given the typical family thousands of extra dollars. It's no exaggeration to say that this great boom in home refinancing is the single most important factor that has kept American consumers buying through the bleakest economy in more than two decades.
But here's the flip side. All this extra cash has expanded mortgage debt. Over the past six months, household debt has increased at its fastest pace in 17 years. As a percentage of disposable income, payments on household debt are close to a record high.
Meanwhile, homes are starting to look overvalued. Compare housing prices to both rents and to average wages, and you see ratios that are also near all-timehighs. This isn't surprising. After all, the main reason housing prices have risen over the past couple of years is because mortgage rates have fallen enough to prompt a lot of people to get into the housing market, and all this new demand has pushed up home prices.
Interest rates can't get much lower. The Fed is almost out of rope. So my guessis housing prices aren't likely to rise any more. They may even fall. As a result, families won't be able to pull more money out of their homes without paying more on their home-mortgage debt. And they can't afford to do that.
To put it another way, most families have maxed out. So this extra boost to family budgets is about gone. The day of reckoning has arrived. Most families have no choice now but to save more and spend less.
What's the result? Well I hate to break it to you like this on this lovely morning in July, but face it: If families now must save more and spend less, this so-called recovery aint going anywhere soon.
