House equity Is Altering Spending Habits and View of Debt

TomF

Just found an on-line newspaper article that describes the housing boom (bubble?) in America but seems to be a good fit for Ireland's present housing price mania. It is in the Los Angeles "Times" and may require registration. I can post the article if enough readers want to see it.


http://www.latimes.com/business/la-fi-homedebt28aug28,0,6044251.story?coll=la-home-headlines

Here are a few quotes:

"But the spending spree has a price. With the savings rate at zero, consumers' eagerness to tap home equity is only worsening their retirement outlook, financial advisors say.

If mortgage rates rise sharply or home prices fall, many homeowners could be in financial turmoil. They may be unable to service their loans, or could even find that their homes are worth less than their mortgages."
...

"One obvious reason for the 69% rise in mortgage debt over the last five years is the exploding cost of homes, which has far outstripped wage growth. That's led many buyers to interest-only loans and skimpy down payments, both of which minimize their equity.

The proportion of buyers whose down payment was less than 5% of the purchase price rose from 30.6% in 2000 to 38.1% this year, according to a new study by SMR Research Corp.

In California, housing prices have increased so much relative to incomes that buyers must stretch all they can."

...

"Some Californians devote much more than a third of their incomes to housing. The report estimates that about one in seven homeowners in the state are using at least half of their income to pay for their house.

Many of these are first-time home buyers, and many of them are relatively young. The report calculates that the greatest increase in homeownership rates between 2000 and 2003 came in the 30-to-34 age group. Second-highest was 25-to-29.

'I think what's happening is that a lot of younger renters feel the ship is passing them by,' said Hans P. Johnson, one of the authors of the report, titled 'California's Newest Homeowners: Affording the Unaffordable.' 'If they don't buy a house now, they think, they never will.'

If their incomes expand as they age, these new homeowners may pay down their mortgage debt. On the other hand, they might devote their additional spending power to toys, trips and other fun things, carrying their indebtedness forever."

Merrion

The situation is worse in Ireland since such a high proportion of the workforce is directly engaged in the housing and construction industry so any downturn in prices will be a double blow.