The Washington Post newspaper holds a competition every year in which readers are asked to supply new definitions for dictionary words that have been altered by one letter. Among this year’s winners was this gem: “Cashtration (n.): The act of buying a house, which renders the subject financially impotent for an indefinite period.”
“Cashtration” is only a wacky made-up word, but it’s also a sign of the times and a hint of possible trouble ahead for some homeowners. The vast majority of the nation’s debt-burdened people can make their mortgage, credit card and auto lease payments, but can they also insure themselves against catastrophic risks and get ready for their retirement and end-of-life years?
The ability to leverage capital through debt helps many people buy real estate and achieve greater wealth than they otherwise might never have imagined. But like all good things, even debt has its limits, and some people have piled their plates with more of it than they can chew and swallow.
Have homeowners crossed the line from aggressive leverage into excessive debt? The answer is a resounding “no” on the macroeconomic level, but a cautionary possible “yes” on the microeconomic scale, judging by the always-cryptic words of Federal Reserve Chairman Alan Greenspan.
Household finances “appear to be in a reasonably good shape” and a significant decline in either incomes or house prices appears to be “unlikely in the quarters immediately ahead,” said Greenspan, who delivered a well-balanced speech on the subject of debt during a recent gathering of savings-and-loan officials. “There are, however,” he added, “pockets of severe stress within the household sector that remain a concern, and we need to be mindful of the difficulties these households face.” In other words, homeowners as a group are comfortable with their debt burden, but individuals within the group can be in troubled waters. That’s a cautionary note for both borrowers and lenders.
While delinquency rates on home mortgages have remained, some analysts have expressed concerns about the overall level of household debt as a percentage of income. One worrisome statistic is the ratio of household debt as percentage of disposable income, which has increased to a record high of 1.20. Yet other analysts and Greenspan himself seem unconcerned about that figure. They argue that home ownership has reached record levels, credit is tapped more frequently for convenience and lenders have utilized technology to apply prudent lending standards.
Those arguments may be true, yet high levels of debt simply aren’t smart for some people. Unwise borrowing eventually will prove painful for families and individuals who have stretched beyond the limits of their individual circumstances. Working families who have mortgaged their home to the hilt (even though it is often their only real asset) could be devastated by the loss of a job or an illness, particularly if they have only one breadwinner and don’t have (or lose) their health or disability insurance.
Or consider college students, who are bombarded by on-campus offers from credit-card companies. Will these debt-burdened young people be able to buy a home when they marry and start families? Or take the Baby Boomers now in their early 50s, who have bought bigger houses complete with brand-new 30-year mortgages. Will they have enough income to make the payments when they retire or will they be forced to dip into the investments that should have sustained them until the end of their long lives? Many of these folks will manage the debt burden. But many others of them won’t, and their pain might not appear in official statistics if family members bail them out of their financial hardship.
Another indication of homeowners’ insatiable appetite for borrowed money is a Fannie Mae pilot program to purchase 40-year mortgages, possibly as soon as early next year. This loan product is supposed to boost low-income and minority home ownership in high-priced housing markets, but is a 40-year mortgage really a good idea or is it just another option for cashtration? A 40-year mortgage builds equity much slower and costs much more in interest than a 30-year mortgage with equivalent terms. Would a 40-year mortgage benefit borrowers or only lenders?
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A postscript: The federal government has been the grand marshal of the debt parade in the last few years. A budget surplus of $127 billion in 2001 became a budget deficit of $413 billion in 2004. That, too, may be more debt than the borrowers (i.e., U.S. taxpayers) can comfortably handle.
Marcie Geffner is a real estate reporter in Los Angeles.
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