Low house prices make for lower debt service payments that benefit the economy as money money is freed up to circulate and buy goods and services.

Common sense dictates that spending less money on necessities boosts discretionary spending. When gas prices are low, the average commuter has more money left over to spend on everything else. The same is true for housing payments: the less a homeowner spends paying mortgage debt, the more money that homeowner has available to save, invest, or spend on goods and services in the economy.

If low debt service payments are good, why are politicians, lenders, realtors and homeowners obsessed with driving up house prices as high as possible? Doesn’t it take more debt and more debt service to support sky-high house prices? Isn’t that a drain on the economy?

Lenders came up with a novel solution: they allow existing homeowners to borrow against the rising value of their houses and spend that money. Rather than spend a few extra dollars in saved mortgage payments each month, lenders give homeowners humongous wads of cash they can spend all at once and stimulate the economy — at least until the bills come due.

As far as lenders are concerned, an economy dependent upon mortgage equity withdrawal is a win-win: they convince everyone high home prices and large debt service payments boost the economy (See: Real estate wealth effect is really a disguised Ponzi scheme). Further, they get to make copious quantities of cash from the hapless borrowers who live from one infusion of debt to another.

Sustainability is key

Rapidly rising house prices are not sustainable, and the HELOC dependency it creates provides an unsustainable economic stimulus certain to result in a painful crash. Financial market implosions purge irresponsible and unsustainable habits from the populace. HELOC dependency serves no one, not even the sheeple who got to enjoy it for a time. The unceremonious fall from entitlement is inevitable, and although the fall is emotionally devastating, getting off the HELOC heroin is better for borrowers in the long term.

The lower debt service payments will benefit the economy as money that previously went to a lender now circulates to buy goods and services.

May 17, 2016, Ben Lane

Americans … share of consumers’ disposable income that’s going to mortgage debt is now at its lowest level in 35 years – the percentage of disposable income going to service mortgage debt – hasn’t been this low since 1980. … “Since the financial crisis, consumers are paying more attention to their debts, particularly longer term financial commitments such as homes and autos,” Blitzer said. “The Total Debt Service Ratio, which includes loans with scheduled payments, is close to a record low. The savings rate is now at about 5% of disposable income, slightly higher than its level in 2004-2006.” …

This may sound like just another statistic, but low debt-service payment obligations will serve as the basis for a sustainable economy less prone to the painful crashes from credit-induced expansions like we’ve had since the 1990s because the spending comes from current income rather than infusions of debt.

The report also shows that the national mortgage default rate is lower than what it was before the housing crisis began, according to David Blitzer, the managing director and chairman of the Index Committee at S&P Dow Jones Indices.

Lenders have only extended credit to borrowers capable of repaying those debts over the last several years. At the bottom of the credit cycle when standards are tight, default rates should drop to near record lows.

“In contrast to the low default rates on mortgages and auto loans, bank cards recently showed increased default rates,” Blitzer said. “The longer term post-crisis decline in the bank card default rate leveled off in 2014. Since then, it has been in a range of 2.5% to 3.2%,” Blitzer said. “Bank card, auto, and mortgage default rates are all lower than their pre-financial crisis levels. However, the bank card rate is more volatile than the others and more sensitive to consumer spending trends. Whether the default pattern for bank cards stabilizes remains to be seen.”

I want to believe

The promise of ever-increasing house prices and unlimited HELOC spending money is seductive. Everyone wants to get something for nothing, and despite the too-good-to-be-true obviousness of the fallacy of free money from housing, it happens often enough that the sheeple fall for it every time.

Like the gambler in Las Vegas feeding a slot machine, the California loan owner will buy any real estate they can to get their shot at HELOC booty. It’s only a matter of time before we inflate another housing bubble and unjustly enrich another generation of useless Ponzis. I want to believe it won’t happen, but those who want to believe in California housing gold will likely make another run at it.

A fork in the road

Many lenders will react to the news that debt-service payments are near record lows as a sign that they need to expand their business. Trillions of dollars of equity needs “liberation” and lenders are there to provide that freedom — and enslave another generation of foolish borrowers.

We are at an important crossroad. We can embrace the low debt-service paradigm and enjoy a slow but sustainable boost to economic growth, or we can reanimate another debt-service monster and boost the economy through unsustainable debt growth. The direction we choose will determine when the next bust occurs and how painful it is.

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