Congress today refused to pass a comprehensive bailout package of the US financial industry and the stock market responded by dropping 778 points, the largest percentage drop since October 1987. I watched people’s reaction on my commute home and was surprised at the lack of emotion displayed by my fellow commuters. This is in stark contrast to my recollection of the response in 1987, where the panic was palpable and pundits talked of suicides. I’m not sure why there’s a difference this time around–perhaps because this drop has been a slow-motion train wreck since the housing bubble started to bust in 2006. Or maybe it’s because we all secretly suspect that regardless of what the government, there may be worse to come. Consider the facts:
- Experts predict that housing prices could decline by an additional 25% just to come back in line with where they would be had they followed the traditional price appreciation path.
- The US Census released a study of housing affordability last week revealing that 38% of American homeowners with a mortgage (19 million households) spend more than 30% of their income on housing costs, and 15% spend over 50%. 30% of income is generally considered the point beyond which consumers begin to have difficulty paying their mortgage.
- 10 million homeowners owe more on their mortgages than their homes are worth, according to economy.com
- More than 4 million homeowners were at least one month behind on their loans at the end of June, and almost 500,000 had started the foreclosure process, according to the Mortgage Bankers Association
- Consumer debt is at an all time high
Simply put, as a country we’re riding a razor’s edge. Because of high consumer debt loads, we have less money available to pay their mortgages at the same we’re paying more in housing than ever before. It’s too early to say how this will ultimately play out for the economy at large. The worst case scenario is that the strain on family finances drives the economy further along a vicious cycle of increased delinquencies and foreclosures, declining housing prices, abandonment of under-water homes, and further declining values.
That may be the worst case, but you can take individual action to open up some breathing room and begin to make some progress. Stay positive, focus on your family, and take action now to strengthen your finances.
Tags: Debt Paydown, GoalSpring, Lending Industy
