Wednesday, April 12, 2006

Homeowners Are Strapped, Glued and Screwed

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If you still believe the US economy hasn't been propped up by second mortgages, or if you doubt the impending doom of enormous mortgage payments that eat up more than half a household's take-home pay, you might want to review the Commerce Department's report on PERSONAL INCOME AND OUTLAYS: FEBRUARY 2006 (pdf). As has been previously reported, this is the first time since the Depression era that the nation is spending more than it's saving.

It's a fact worth repeating to those who would doubt it.

The next report is due out May 1.

As stated in the BEA's February report:
Personal saving as a percentage of disposable personal income was a negative 0.5 percent in February, the same as in January. Negative personal saving reflects personal outlays that exceed disposable personal income. Saving from current income may be near zero or negative when outlays are financed by borrowing (including borrowing financed through credit cards or home equity loans), by selling investments or other assets, or by using savings from previous periods.

In case you're wondering how "personal savings" is defined, the BEA explains it here:
Personal saving is the amount left over from disposable personal income after expenditures on personal consumption, interest, and net current transfer payments. This amount is available to acquire financial assets such as bank deposits and mutual funds, to use towards acquiring a home, or to reduce liabilities by repaying principle on mortgages or consumer debt.

If expenditures on personal consumption, interest, and net current transfers exceed disposable personal income in a quarter, personal saving will be negative. This can occur because current income is not the only possible source of funds for consumption expenditures. Although spending must eventually fall back into line with income, households can spend more than their after-tax income for a time by withdrawing deposits saved in previous periods, by selling financial or tangible assets, or by borrowing. Indeed, an individual household’s saving is unlikely to be positive over the short run when it makes a major purchase of a consumer durable good such as an automobile, and even at the aggregate level, personal saving may fluctuate in periods when an unusually high number of households make such purchases.

-- The Boy in the Big Housing Bubble/Los Angeles and Beyond