Household debt just increased – does this make the recovery “real”

by Rob Regan on February 28, 2013

From Business Insider 

The New York Fed just published its latest Quarterly Report On Household Debt And Credit.

At $11.34 trillion in Q4 2012, total household debt is up from $11.31 trillion in Q3.  This suggests that the great consumer deleveraging story may be over.

The article has a rather nice chart depicting the total make up of household debt.  The big kahuna is mortgage debt which is 71% of the total at roughly $8 trillion.  Mortgage debt had peaked in 2008 at $10.128 trillion, and today’s level is the same as Q3 2006 which is the last time is was considered “sustainable”.

The Business Insider headline is rather provocative:
“BREAKING: The Great Household Deleveraging May Finally Be Over”

The reason is that mortgage debt finally INCREASED.  If deleveraging is over, then we can finally call this recovery “real” and/or unstoppable – loans create deposits, which is another way of saying they add money to the economy and therefore increase incomes for others and spur on the economy.  A common refrain is that “housing leads recoveries” and that is why this recovery has been so tepid.  So if mortgage debt takes off again, house prices will take off with it, construction jobs, and all kinds of other economic activity as well and the recovery will have legs… or finally be considered “real”.

But… is deleveraging over?  Is getting back to 2006 levels, just before the last bubble peaked sufficient?  To me it suggests we’re merely in a good place, but without a lot of room to grow.  On the other hand, because interest rates are almost half what they were in 2006 that means we have a long potential recovery road ahead of us due to affordability that wasn’t present in 2006.  To put it another way, what if in 2006 rates kept dropping?  That would have allowed home prices to keep going up allowing the housing bubble to continue for several years.

So what is a buyer or seller to do?  “Stay Frosty” or alert and aware of the market.  In San Francisco you could have bought in 2006 and sold in 2008 and done fine.  Or bought in 2006 and waited until now to sell, and do fine.  But you needed to be aware of all of the critical trends, like availability of loans, affordability, trends in prices, etc.

If you’re a seller and considering when to sell what you’ll be doing next has to be a huge consideration.  But just looking at the price of your home today, and the market action, and if it is anything like 2006, it means we’re near the top.  Could affordability run up prices even more?  Well, this is all a guessing game, and all I can tell you is what the market is like right now, and it is fantastic for sellers.

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