First Refinances, Then Credit Cards. What’s Next?
Every time I think the level of consumer credit in the U.S. can’t get much worse, it does just that. After reading this report about the 7.4% increase in credit card debt in November, I’m starting to wonder again.
For years it seems Americans relied on their houses as an ATM they happened to live in. Cash-out refinances made up about 50% of mortgages issued by Freddie Mac in 2006. By the beginning of 2007, 82% of mortgages issued by Freddie Mac were cash-out.
Now apparently we’ve switched back to our old stand by, credit cards. As the refinance well dries up, more people are needing to carry higher balances to support their lifestyle or cover an emergency in their life. I wonder though, how much longer this can go on.
What’s next?
After the house is mortgaged to the hilt and the credit cards are maxed, what will people do? I wonder what the next source of consumer debt will be, because I’m sure of two things. One, Americans don’t seem capable of reigning in spending to any great degree. And, two, where there is demand, there is supply. Someone will market a product that will allow people to increase their debt load.
So what’s next - widespread car pawning?
January 9th, 2008 at 7:10 am
What’s next? Payday loans.
January 9th, 2008 at 10:18 am
“So what’s next - widespread car pawning?”
No, no, no, you forgot that people can take out loans from their 401(k)
January 9th, 2008 at 11:38 am
@frank, I saw something on Boston Girl’s Open Wallet about a person taking out a lot of money from her 401(k) so she could go to Bermuda. But it wasn’t a loan, I think, she just took it along with the penalties. *shudder*
January 9th, 2008 at 6:54 pm
I think I heard that same story on NPR. I just turned the radio off.
January 10th, 2008 at 10:02 am
Wow, along with the penalties….man.
January 10th, 2008 at 8:04 pm
more debt at a higher rate could equal more profits if defaults don’t rise by as much as the increased debt load (which is most likely what will happen). I mean c’mon Amex is down 6% on $250m in after tax write-offs.
A good play would be to go short retail on a move up (as the consumer uses their credit cards to keep on buying) and go long the consumer credit companies (which are more beat up than the retailers). As the consumer gets loaded up, they will use their money to try to pay off their credit cards and stop spending, thus hurting retail and making money for the credit card companies.
January 11th, 2008 at 4:41 am
I’ve always said our current market correction is going to bring to light just how much of America has been living beyond their means.
The days of using home equity like an ATM are over! Unfortunately you’re correct, new schemes abound and the desperate consumer falls victim. Schemes such as Pay Day Loans (I use the term “scheme” differently here. Though some people use Pay Day Loans properly, many fall victim to the high interest rates and find themselves unable to pay at which point the debt hole keeps getting bigger and bigger).
One homeowner went as far as vandalizing their own home (cabinets, doors, toilets…everything!). They took it all to TJ to sell it! The police was called but they couldn’t prosecute because although the home was undergoing foreclosure, it still legally belonged to them and they could do as they pleased.
January 11th, 2008 at 5:52 am
@ Ricardo - That would explain the condition of the short sale house we looked at - security system ripped (literally) out of the walls, no appliances, etc.
August 12th, 2008 at 5:34 pm
It seems like American just go from one bubble of credit to another. First stocks in late 90’s, then mortgage/housing, and now credit cards. I try and promote responsible use of any form of credit and a lot of people do use them right, but unfortunately it seems like just as many use them the wrong way. The average credit card debt in America is now $4200 per person, but keep in mind they count monthly balances whether they are paid off in full or not so that number is a little skewed.