Sunday, January 16, 2005

Foreclosure rate a warning

Denver Post

There's something almost schizophrenic about recent consumer home buying patterns in the Denver metro area.

Home sales are booming, yet at the same time, so are the number of local foreclosures and personal bankruptcies.

Economist Tucker Hart Adams says it's a troubling situation. Conditions are supposed to be improving, as measured by modest job growth in 2004 and optimistic projections for 2005. But consumers' penchant for spending, which became habitual during the boom years leading up to 2001 and never receded even during the downturn, is catching up with them and could eventually have a negative impact on an economy still trying to recover.

There's no need to become a foreclosure statistic - the new year is a good time for consumers to take stock of their debt portfolios and begin to clear them up.

Family debt problems began to take shape in the 1990s and 2000, when consumers got caught up in the spending frenzy. First-time homebuyers overextended themselves, lured by low interest rates as well as such innovative incentives as no-down payment loans. With no-document loans, some homebuyers were able to get a mortgage without a credit check.

Existing homeowners were in on it, too, refinancing their mortgages or borrowing against their houses to make other purchases. In the process they drew down their equity and built up more debt. In each scenario, people were borrowing more money than they reasonably were able to repay.

In the short-term, higher home sales bode well for the economy. But longer-term, Adams fears a negative impact if current foreclosure and bankruptcy trends continue and if large numbers of consumers eventually decide to drastically cut back their spending. Indeed, it could even ensure another recession, Adams said.

The best advice to consumers is: Be smart; don't take on more debt. "Think long and hard about worsening the problem," Adams said.


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At 9:37 AM, Anonymous Anonymous said...

Heavy debt lowers spending, making the dollar worth less. This increases unsold inventory as retailers stockpile goods they can no longer move.
Consumers hunker down buying fingerprint safe, survival rations, handguns and other items in an attempt to feel secure. At least some retailers are thriving...


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