Debt, Debt, and More Debt

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After seeing this household debt bubble chart, I’ve been especially sensitive to news about consumer debt. Here are some recent stats from across the spectrum:

According to real estate data firm CoreLogic, 22.7% of US homes with a mortgage had negative equity in the first quarter of 2011, meaning the outstanding mortgage amount was greater than the value of the property. That’s 10.9 million of them, and another 2.4 million had equity of 5% or less, which means with any further drops they’ll be in danger as well.

Nevada was the state with the biggest share of homes underwater, at 63% of all mortgaged properties, followed by Arizona (50%), Florida (46%), Michigan (36%), and California (31%). Goodness.

Home Equity Loans
The same report also found that a hefty 38% of borrowers who took cash out of their residences using home-equity loans are underwater. By contrast, only 18% of borrowers who don’t have these loans were underwater. Check out all the home equity extracted up until 2008, which is slowly being paid back now.

Is there some good data about what all this money bought?

401(k) Loans
Human-resources consulting group AON Hewitt reports that nearly 30% of 401(k) participants currently have a loan outstanding, the highest in recent history. On a purely interest-rate level, these loans can actually be a pretty good deal. (Don’t listen to the double-taxation myth perpetuated by Suze Orman and others.) However, you have the potential penalty of losing the preciouis tax-deferred benefit plus a 10% penalty if you don’t pay it back in time (and if you lose your job, it’s due even sooner). Still, having nearly a third of all people dipping into their retirement money can’t be a good thing.

Sources: ConsumerAffairs, LA Times, WSJ, SmartMoney

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  1. I don’t know where this money went, but my guess is that whatever was bought with this money mostly long gone: vacations, clothes, luxury vehicles (which are now 6-8 years old), etc. In other words not much to show for it.

  2. Some of the folks used their lines of credit to remodel their homes, betting the investment would pay off in the form of ever higher equity. A clear bubble all around.

  3. Baughman says:

    My coworker bought an escalade with his 401k loan. Great use of funds.

    So when will home prices bottom & interest rates skyrocket? Surely the negative equity in homes will push home prices even further down, despite claims that affordability is near record lows (also in terms of rent/own)? Perhaps the answer is depressed rent prices & home prices. Not to mention the currently artificially low interest rates. When they take off, surely home prices will further dive, since consumers afford payments, not prices. The only thing going for home prices is a future threat of inflation, which admittedly is a strong possibility.

  4. Baughman says:

    *** He “needed” an escalade because he has 3 kids. That makes sense.

  5. I see alot of foreclosures in the happening before Decmber 31 2012 (forclosure tax law expires), especially if these figures remain the same or get worse. I wonder what thats going to do to median home prices…=)

    I bet this will be a big issue in the 2012 races.

  6. My condo is underwater, but I bought at a bad time and it’s not very far negative currently. I also have a 401(k) loan, which I used to buy the condo, and it’s almost paid back. I wouldn’t have done what I did if I’d known how far the housing slide would go, but too late to worry about that now. At least I don’t have other debt and I wasn’t planning on flipping the property.

    It has amazed me talking to others about what they did with loans or withdrawals from their 401(k) – just like Baughman’s example some “needs” were just too important I guess.

  7. From Harvard’s The State of the Nation’s Housing Report released this week:

    “Burdens are moving up the income scale. Among households with real incomes under $15,000, 66.4 percent spent more than half their incomes on housing in 2009–an increase of 4.8 percentage points from 2001. Households with incomes of $30,000-45,000 saw a 4.2 percentage-point increase, bringing the severely cost-burdened share to 11.5 percent. Moreover, the share of households with incomes of $45,000-$60,000 paying more than half their income for housing nearly doubled to 6.4 percent.”

    That’s a very bad indicator which I believe excludes those who have walked away or been foreclosed. HH incomes $60k and under is a huge segment of the population.

  8. owning a home is boo-sit

  9. In the meantime, some folks are spending zero percent of their income on their housing:

  10. This all fairly philosophical, rather than practical question.

    People still has to live somewhere. So they need tangible structures.
    While if you look at England, for example 40% on new mortgages are interest only ones.

    It means that people never intended to repay them, only counting on the property price go up. This is typical for western europe as the whole.

    As far as debt goes – we will just keep it selling to China, Japan, Saudi, Russia , etc.. they have no choice now, otherwise we will go default.

  11. I like your straight-forward example of 401K loans not being double taxed.

    As far as the housing crisis – at some point it will make sense to do the opposite of what everyone else is doing. The next few years might be a great time to purchase a house.

  12. Have you ever heard of people taking loans from their 401k (especially during down markets) to try and get extra money into the account?

  13. Kathlyn Garnet says:

    There are many factors affecting debt. However, many people would give strong emphasis on either economical crisis and unwise spending. The key to debt removal: successful investment.

  14. Alexandria says:

    “Is there some good data about what all this money bought?”

    Most of the people I know with massive home equity loans ($200k-$400k) simply used they money to support lifestyles they couldn’t afford while they were unemployed/disabled. I can think of two people in particular who really don’t have much of anything and blew through $300k-ish in just a few years. They will both tell you they were unemployed and/or had medical problems. They both initially bought their home at the $100k-level, which is unheard of around here since the 90s. I was disgusted to watch them waste that opportunity and lose it all. For one family the wife was making the same amount I support my entire family plus $200k mortgage on. So yes, I do roll my eyes at the idea they had to borrow all that money. Sad thing is neither people I am thinking of is particularly extravagant. Lots of eating out and toys for the kids – stuff like that – nothing to show for it. Though I am sure their vehicles were financed by their home equity.

    Some invested it in the stock market, at the advice of their (commision-based?) investment advisors. As a tax professional, I see investment advisors continually encouraging my clients to borrow equity for stocks. Most people don’t question the advice.

  15. Phoenix says:

    30% of 401(k)s out on loans is a scary thought. Makes me wonder how much of our equity market is owned by debt (with stock margins, retirment plan loans, etc.) i would imagine the amount of debt supporting or equity markets is huge. If the cost of that debt goes much higher and as the defaults on the debts increase, we could be in for a steep ride down.

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