Bad Debt is Ballooning

As real estate investors we are very familiar with the difference between good debt and bad debt. Good debt is debt that is used to purchase income producing assets. Bad debt is merely for consumption. That’s the debt that is used to buy everything from your car to your home renovation. 

A recent story in the Wall Street Journal illustrates how bad things have become, with bad debt. Families across the country are going deep into consumer debt to maintain a middle class lifestyle, even if they can’t afford it.

Cars, College, homes, medical care have all gone up in price over the past two decades, while incomes have not changed very much at all in that time frame. Increasingly, consumers are turning to credit to fill the gap. 

Student debt has ballooned to $1.5 trillion last year, taking second place behind mortgages.

Automotive debt has increase 40% in the past decade, adjusted for inflation and is now at 1.3 trillion. Alarmingly, the default rate on automotive debt is way up.

Unsecured personal loans are up. 

The simplest and easier form of consumer debt is the household refinance. Many people are continuing to bury consumer borrowing in their residential mortgage. 

Inflation is an average. As always with an average, some items rise faster than inflation, and others rise slower than inflation. Wages are up 135% in the past 3 decades neglecting inflation. When you take the government reported numbers for inflation into account, incomes have not moved.

College tuitions have increase 540% in the same time period, without adjusting for inflation. Health care costs are up 276% over that time period. The middle class is shrinking, and they don’t know it. 

The Trump administration is reducing how much home equity mortgage borrowers can withdraw through cash-out refinances.

 

Starting Sept. 1, the Federal Housing Administration will limit the money available for cash-out refinance activity to 80% of the home’s value or less. Previously, borrowers could take out up to 85% of the property’s equity.

The new loan amount limit is in line with the limits already in place at Fannie Mae and Freddie Mac.