For all those starry-eyed readers of Floyd Norris' New York Times [5] real-estate column this morning who have been out viewing new homes this afternoon and already scratching together the down-payment with the family's EBT cards, we have a little contextual reality checking. Norris points to the factual reality that a broad ratio of all financial obligations - both homeowners and renters - relative to disposable income stands at an impressive-sounding lowest level since 1984, and uses this wondrous statistic, in its sublime uniqueness, as an indication to suggest the consumer may be coming back as the household debt burden has been so reduced from a record 14% of disposable income to a 'mere' 10.9% now indicating just what good little deleveraging beings we Americans have been.
Norris's justification for a bright shining new consumer-driven reality as real-estate must go up from here (given the deleveraging and 'cheapness' relative to income)...
[6]
However, as Nomura noted so clearly this week, this statistic is just a small part of everything when we consider the balance sheet (and not just cash-flow) of the household, 'many homeowners are likely to take little comfort from the decline in average debt service costs relative to incomes.' For millions of homeowners whose property is now worth less than the debt used to finance it, mortgage interest costs may be more usefully gauged relative to the equity they retain in their homes.
Mortgage Debt Servicing Relative to Housing Equity...oops! Not quite such a pretty picture...
[7]
For them, these monthly debt service payments are necessary to retain their claim on an asset whose value has fallen and might not recover as the $3.7tn negative-equity 'gap' should remind us that the economic crisis of the past decade has taught a new generation a painful lesson about the dangers of excessive debt.
Debt and net-equity in owner-occupied housing...
[8]
This is the sad reality that millions of households face every month and while the mainstream continue to push the old 'new' normal of the new-new American Dream, with Norris' own hope-laden words so prescient a reflection of this anchoring bias: "the outlook is seldom as bleak as it seems in the immediate aftermath of a calamity", we remind those with animal-spirit-hopers that the economic crisis of the past decade has taught a new generation a painful lesson about the dangers of excessive debt. Unfortunately, as Reinhart and Rogoff’s research reminds us, we could have learned these lessons far less painfully from history books rather than from first-hand experience.
Source: Nomura, New York Times