Tuesday, March 26, 2013

Too Much Housing Related Debt for Individuals, Including Oldsters

Excessive debt is holding back economies from growing today. And that debt is held by far too many individuals, cities, states and national governments, one and all.

Since houses are the most expensive asset most people own and are mostly financed with long term debt, the bursting of the housing bubble caused terrible financial problems for many Americans. We all learned that home prices can go down as well as up. Unfortunately, too many of us learned one extremely valuable piece of personal financial knowledge far too late --- that debts owed on a mortgage and a home equity loan aren't reduced as the value of the house decreases. We find that we've put ourselves in a hole from which there is no easy way out. And more 'easy' money from our creditors isn't available to bail us out.

When we were young, the idea of owning a home was sold as a 'can't miss' American dream. But when the housing bubble burst a few years ago, that dream became a nightmare.

Hopefully, we'll seriously rethink as a society whether loading up with debt at an early stage in life to purchase a big ticket item such as a house is a good idea, but that rethink won't help lots of people today who are underwater NOW.

And maybe we'll also learn that the government isn't doing us any favors by in essence making available low interest fixed rate loans for thirty years, the interest on which is tax deductible to us, as are the property taxes paid on those homes. And that the deductibility of interest on subsequent home equity loans isn't such a good deal either. Debt is always debt. And maybe a house is just another big ticket purchase where debt isn't necessarily cheap and easily repaid.

In any case, and largely as a result of the dream turned nightmare of housing, lots of oldsters are having home related debt troubles these days.

So now that we've all come to learn that housing prices aren't a one way street where prices only climb, let's look into the troubling debt position of many older people today.

Older Households Loading Up on Debt has the story:

"America's seniors are becoming more likely to increase their debt—and saw the biggest percentage jump in borrowing relative to other groups over the past decade.

The median level of debt among households led by someone 65 and older—the level at which 50% are above and below—rose nearly 120% between 2000 and 2011 from roughly $12,000 to $26,000, due largely to rising mortgage debt, according to a Census report released Thursday.

The report raises concerns about the financial health of older Americans at a time when many are worried they lack the savings and investments to retire comfortably. The recession damaged many seniors' nest eggs and fewer Americans are saving as much for retirement. The Federal Reserve's strategy for spurring the economy—low interest rates—has the impact of reducing returns for seniors on safer investments.

Older households "are less likely to own their homes free and clear than was once the case," said Richard Fry, an economist at the Pew Research Center. Increased homeownership by seniors explains some of the increased debt, but older Americans have also ramped up use of "home-equity" loans, where consumers borrow against the equity in their homes, he said.

Granted, older Americans tend to be wealthier and survived the housing crash in relatively better shape than younger households. Younger people also owe more relative to their incomes than older people. And seniors are also working more, making paying off debt easier.

Still, the new figures show seniors have grown more likely to be in debt, even as other groups pare back. People 65 and older were more likely, for example, to have a mortgage in 2011 compared to 2000, while people under 55 were less likely to have a mortgage—or any debt, the Census said.

Those 65 and older saw their typical "secured debt," largely mortgages, rise from around $25,000 to $50,000. Seniors started taking on more "secured" debt early in the 2000s, ramped up dramatically between 2005 and 2009—and then eased off borrowing around the end of the decade, Census data show.

The rising debt load also comes as seniors' wealth has fallen due to the recession. The median net worth of American households—the value of assets like homes and stocks, minus debts—was around $69,000 in 2011 compared with $82,000 in 2000 and $107,000 in 2005. In a report last year, the Fed also noted a "marked increase" in debt among older families.

The burden of more debt isn't limited to just seniors. People ages 55 to 64 saw their typical or median household debt rise 64% to $70,000. Younger people, meanwhile, are borrowing more to pay for college, even as they cut credit-card use. Those under 35 saw their typical debt rise 13%. Overall, the typical U.S. household's debt rose 37% between 2000 and 2011 to $70,000."

Summing Up

The facts are clear. We're a nation of debtors.

And that's not a good thing to be, especially if we're among the oldsters.

Of course, home loans, including home equity loans taken out during the housing bubble, are the biggest reason for the oldsters' financial dilemma.

But then there are student loan obligations for the youngsters, which many oldsters signed on for as well.

Debt becomes exponentially a bigger problem as we age. Our earnings have peaked and may even be over, and our retirement income isn't likely to be sufficient to take care of our financial needs in our older age. And this income shortfall is made bigger by the low interest rates being paid to savers today.

Thus, the last thing oldsters or near oldsters should have burdened ourselves with is new or added debt, but unfortunately, that's the situation in which too many of us are in today.

And there's not a whole lot that can be done about it now.

That's too bad, but that's the truth.

Thanks. Bob.

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