Government guarantees, global capital flows, and a consumption binge add up to a national mortgage crisis.
By Robertson Morrow
From the security of their own homes, many sneer at the get-rich-quick crowd that lost money when the tech bubble burst. But many who would throw stones are living in glass houses—barely maintained by fragile second mortgages. The brash sales pitches, reckless spending, and short-sighted decisions that fueled the dot coms’ rise and fall have taken over the mortgage market. Everyone now knows about the tech bubble because it has already burst; fewer recognize its near neighbor, the mortgage bubble because they are living in it.
Generations have bought homes by borrowing 80 percent and paying it down over 30 years. No longer. Now the American home is just one more credit line to be tapped. The problem is not that we have been assuming larger mortgages in order to live in larger houses that we can afford because of larger incomes. The problem is that Americans have had roughly the same incomes and the same houses but have been mortgaging a larger percentage of those values.
One problem with borrowing all this money is that people might not be able to pay it back. Another is that, for the foreseeable future, Americans will be spending a large proportion of their income on debt service. This will constrain consumer spending—two-thirds of the economy—which will retard economic growth for the remainder of the decade. Slow economic growth will inhibit income growth, preventing us from earning our way out of the hole into which we have dug ourselves. Moreover, at some point, we will exhaust the supply of money available using homes as collateral. In 2001 and 2002, Americans extracted $300 billion in cash from their existing homes through refinancing and home equity loans. This infusion of cash is what has fueled rising consumer spending in the face of recession.
For the first time in financial history, a major debtor nation owes its debt in its own currency. This means that rather than exporting goods to buy foreign currency to repay that debt, we can just print the money. We inflate the dollar to pay off foreigners in money that is not worth very much. Creditors will oppose destroying the dollar, but they lack the political clout of millions of American debtors. This opens the possibility of major inflation or polarization of the American political system between those serving the interests of foreign creditors and those representing American mortgage-holders. Neither is an attractive possibility, for either means the U.S. economy should be prepared to take a bubble bath.
Robertson Morrow is a financial analyst in San Francisco.http://www.amconmag.com/2003/02_10_03/cover.html
Tags: Housing Bubble, Living in a Bubble, New Home Executives, Ruben Colon
