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Monday, May 14, 2012

Housing Debt A Huge Burden

Story first appeared in USA Today.

Feeling like you're drowning in credit card debt, student loans and medical bills?

If you are, you're likely not alone — and that could explain why everywhere you turn you hear ads offering some quick-fix deal to cope with debt.

About one in five U.S. households owe more on credit cards, medical bills, student loans and other debts that aren't backed by collateral — so not including car loans — than they have in savings, checking accounts and other liquid assets, according to a new University of Michigan report. Some families have not been able to make substantial headway.

Average savings levels have gone up since 2008. But the U-M research showed that there had been no improvement in financial liquidity between 2009 and 2011 — except among families with more than $50,000 in savings and other liquid assets.

Families feared the worst.

In other words, families who could afford to save more money often did so because they feared the worst.

Research did not show how families built more savings, but they may have cut spending and they sold riskier assets and put that money into savings accounts.

At the same time, others who were hit hard with higher payments on adjustable-rate mortgages, declining home values and job loss had an extremely tough time rebuilding their savings.

The U-M results are consistent with other data showing that a large number of lower-middle income households have negative net worth. Families owe more than they own, and are having trouble managing their debt.

But higher-middle income and high-income households have much stronger balance sheets, and they aren't having difficulty paying their bills.

Not everyone is drowning — but even so, some may fear they're only treading water.

The U-M report showed:
• Many families fear more mortgage troubles ahead.

About 1.7% of families surveyed in 2011 said it is very likely or somewhat likely that they will fall behind on their mortgage payments in the near future.

It isn't much of an improvement compared with 2009 during the crisis when 1.9% of families had such expectations.

For some families, the concern is whether they'd have enough cash flow to cover the mortgage and housing expenses after taking a pay cut, seeing a spouse lose a job and struggle to find another or dealing with an earlier-than-expected retirement.

It's possible, Stafford said, there will be continuing troubles for mortgages in 2012 and 2013.

• Yet there is some optimism about housing.

Stafford noted that about 4.6% of those families surveyed said they're very likely or somewhat likely to fall behind on their mortgage payments in the coming 12 months. That's down significantly from 6% who expressed that fear in 2009.

• Many homeowners easily turned into renters after the crisis.

If you ended up behind on a mortgage in 2009, the U-M research showed that there was a good chance that you moved out of a house and ended up renting two years later.

Among homeowners who were behind on their mortgage in 2009, the report showed that 19.3% were renters by 2011.

By contrast, just 6.5% of homeowners were renters by 2011 among those not behind on mortgage payments in 2009.

• Nest eggs weren't quickly rebuilt after families dug into savings to pay bills.

Families with no savings or other liquid assets rose to 23% in 2011, up from 18.5% in 2009.

• Credit card debt can turn into a huge burden.

About 10% of families in 2011 had $30,000 or more in credit card debt and other non-collateralized debts. That compares with 8.5% in 2009.
High housing costs a bad sign

Who got into the most trouble?

One predictor proved to be areas where a large group of people had dedicated an extremely high share of family income — say 25% or more — toward housing.

If people made what Stafford calls an excessive commitment to housing in 2007 before the housing collapse, they faced greater difficulty once home values tumbled and the Great Recession hit.

Families continue to face difficulties because there are still a lot of underwater mortgages out there.

Any additional stress on household finances would undermine whether the mortgage is paid. Being underwater with a mortgage and other debts, clearly limits a consumer's ability to take on debt to support other types of spending.

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