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Mortgage Debt and Credit Card Debt In the American Household
Mortgage and Credit Card Debt According to Greenspan
According to remarks made by ex Federal Reserve Chairman Alan Greenspan in 2004 at America's Community Bankers Annual Convention in Washington, DC,
"In recent years, banks and thrifts have been experiencing low delinquency rates on home mortgage and credit card debt, a situation suggesting that the vast majority of households are managing their debt well. Yet many analysts focusing on broader macroeconomic conditions are far less sanguine in their assessments. They have been disturbed particularly by the rising ratio of household debt to income and the precipitous decline in the household savings rate. The analysts point out, correctly, that the ratio of household debt to disposable income has risen especially steeply over the past five years and, at 1.2, is at a record high. Moreover, many have recently become increasingly concerned about the exceptional run-up in home prices. They argue that a collapse of such prices would expose large, recently incurred mortgage debt to decreasing values of home collateral."
Over the last 10 years, homeowners and renters have both seen an increase in the percentage of their income that goes to credit card debt. Greenspan goes on to state that renters who recently purchased homes appear to carry much higher levels of credit card debt in addition to their mortgage debt.
Greenspan notes that credit card debt-service ratios have risen but cites the reason for this rise in debt as the new, non-traditional uses for credit cards. For example, in today's economy, consumers are using credit cards for everything from groceries to gasoline to convenience store purchases, not only because you can pay Tuesday for the hamburger you eat today, but because they are convenient. Ideally, if a consumer uses credit cards in this fashion, he or she should completely pay off the balance of each credit card at each monthly cycle, but that is unfortunately rarely the case.
Increased credit card usage alone is not sufficient evidence to support increased consumer stress, according to Greenspan. He does although, finally acknowledges that "There are, however, pockets of severe stress within the household sector that remain a concern and we need to be mindful of the difficulties these households face."
Greenspan concludes that if consumers experience a significant decline in personal income or if house prices dropped quickly there could be repercussions. His final comment to lenders was the following: "If lenders, including community bankers, continue their prudent lending practices, household financial conditions should be all the more likely to weather future challenges."
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