Housing.com News, Analysis & Opinion: Everything Is Connected

Consider what's been happening in the news lately. First, existing home sales rose again in August, and Greenspan issued another ponderous warning, while simultaneously avoiding any explanation for why the Fed raised interest rates. Apparently, this is all consumers' fault for accepting all of those "creative" loans that the real estate industry has been pimping for the past half-decade. Meanwhile, new home sales suddenly dropped by 9.9 percent, but median sales prices increased nonetheless.

In another take on Greenspan's warning, he backpedals yet again by saying most homeowners are safe. Yet if you read the full text of his speech, you'll find something interesting:

Another fourth funds repayment of nonmortgage debt that had been used, in effect, as bridge financing, predominantly of personal consumption expenditures...Home mortgage debt is thus the final source of funding of some consumer outlays originally financed by extensions of credit card and other consumer debt.

In other words, people are using mortgage debt to pay off credit card debt, because it's cheaper.

Simultaneously, credit card companies are facing dire financial futures as customers wise up, pay off their cards, or switch to things like HELOCs to pay debt and raise spending cash. Here's the killer line from that article:

Credit-card use has exploded in the last decade but many consumers don't carry balances from one month to another. That's reduced interest income from receivables.

Credit card companies are so reliant on consumers maintaining balances from month to month that they often don't have enough capital put aside to cover the losses from revenue. That's exactly what happened to credit giant MBNA--they lost so much money from consumer payoffs that they were ripe for takeover by Bank of America.

So, credit card companies are in the clinch because consumers are paying off their debt. Consumers are shifting one mountain of debt by taking on another just to keep afloat. Realtors and brokers are almost hysterically trying to maintain the illusion that the bubble can sustain itself and homeowners can--and should--continue to tap their equity in order to keep consumer spending afloat.

Now, with the mandatory minimum increase in credit card payments and the new bankruptcy laws taking effect this month, combined with high gas prices and high heating/oil prices, you'll see more Americans stepping back even further from any sort of major expenditures. That'll push spending down even further, and may make them more reliant on credit cards or equity financing just to stay level.

And if housing prices begin to seriously sag nationwide, or credit card companies begin raising fees as a whole...well, like I said, the picture is anything but pretty.

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I was chatting with the man bloggers know as Bubble Meter, and one thing we agreed upon was that most people don't see the connections between developments in markets. It's all part of a larger picture, and that picture is anything but rosy. Consider what's been happening in the news lately. First, existing home sales rose again in August, and Greenspan issued another ponderous warning, while simultaneously avoiding any explanation for why the Fed raised interest rates. Apparently, this is all consumers' fault for accepting all of those "creative" loans that the real estate industry has been pimping for the past half-decade. Meanwhile, new home sales suddenly dropped by 9.9 percent, but median sales prices increased nonetheless. In another take on Greenspan's warning, he backpedals yet again by saying most homeowners are safe. Yet if you read the full text of his speech, you'll find something interesting: Another fourth funds repayment of nonmortgage debt that had been used, in effect, as bridge financing, predominantly of personal consumption expenditures...Home mortgage debt is thus the final source of funding of some consumer outlays originally financed by extensions of credit card and other consumer debt. In other words, people are using mortgage debt to pay off credit card debt, because it's cheaper. Simultaneously, credit card companies are facing dire financial futures as customers wise up, pay off their cards, or switch to things like HELOCs to pay debt and raise spending cash. Here's the killer line from that article: Credit-card use has exploded in the last decade but many consumers don't carry balances from one month to another. That's reduced interest income from receivables. Credit card companies are so reliant on consumers maintaining balances from month to month that they often don't have enough capital put aside to cover the losses from revenue. That's exactly what happened to credit giant MBNA--they lost so much money from consumer payoffs that they were ripe for takeover by Bank of America. So, credit card companies are in the clinch because consumers are paying off their debt. Consumers are shifting one mountain of debt by taking on another just to keep afloat. Realtors and brokers are almost hysterically trying to maintain the illusion that the bubble can sustain itself and homeowners can--and should--continue to tap their equity in order to keep consumer spending afloat. Now, with the mandatory minimum increase in credit card payments and the new bankruptcy laws taking effect this month, combined with high gas prices and high heating/oil prices, you'll see more Americans stepping back even further from any sort of major expenditures. That'll push spending down even further, and may make them more reliant on credit cards or equity financing just to stay level. And if housing prices begin to seriously sag nationwide, or credit card companies begin raising fees as a whole...well, like I said, the picture is anything but pretty.