A simple BIG BIG Problem
In 2000, the income of the average American family was somewhere around $50-60K.
Today, the income of the average American family is somewhere between $50-60K.
Between 2000 and today, costs for the average American family has skyrocketed in the following areas: Debt Service Expenses, Health Insurance, Homeowners Insurance, Property Taxes, Food and Fuel.
If the above wasn't bad enough, here is where the BIG BIG Problem comes in:
Home prices skyrocketed between 2000 and 2006. Prices increased by 100% or more in a very short period of time while incomes remained about the same and non housing expenses skyrocketed. Based on income versus expenses, consumers can likely afford even less home today than they could in 2000.
It appears approximately $6 Trillion dollars worth of mortgages and over $2 Trillion dollars worth of home equity loans were taken out against the inflated values of homes.With now declining home values, we may be staring at over $8 trillion dollars mortgages and home equity loans not fully secured by the current value of the home.
With rapidly rising prices, the consumer is facing increasing burdens to meet monthly obligations. Now with a slowing economy and pink slips on the rise, the delta between ability to pay and obligations is likely to gap further apart. This ability to pay affects our entire economy, especially counterparty obligations such as debt and rent.
Why is highlighting counterparty obligations important, because failure by one necessarily affects another potentially causing a chain reaction of defaults.
The above trillions in mortgages were sliced, diced, and repackaged and sold for billions in profits and generated billions in taxes. Now that the billions in profits are evaporating, billions in taxes are being refunded likely to lead to enormous deficits. Not only are billions in profits evaporating, billions in losses are being reported, some by banks that didn't even report losses in The Great Depression. With banks losing billions, the ability to lend will likely be impaired. Also, shrinking tax revenues deminishes government's ability to spend. With less lending and less spending, further contraction will result leading to who knows what end.
So next time someone tells you the current problem we face is like the S&L crisis, or only a few hundred billion dollar issue, just laugh because you know the problem is really very simple and very very BIG.
Captain, did we just bump into something?