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People Will Not Want Mortgage Debt in the Future

Published by Lawrence Roberts | December 26th 2008 | Views:

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The next big psychological change to impact housing will be a change in homebuyer's relationship with debt. When prices were going up, and nobody thought they were going to have to pay the debt off themselves, people borrowed all they could. Once prices stopped going up, and people were faced with paying off these enormous debts, the appetite for borrowing cooled significantly.

Equity can be created in a home in two ways: you can pay down the debt, and the house price can appreciate. During the Great Housing Bubble, it was not fashionable to pay down debt. It is a slow way to build equity, and it requires sacrifice. During the bubble, appreciation happened much faster, and it required no additional funds to go toward a housing payment. Under those circumstances, only the most fiscally disciplined and conservative paid down their mortgage (and they are the only ones whose houses are not in jeopardy.) As the price decline drags on, which it will for several more years, people will come to realize that equity does not appear magically, but it is only obtained through retiring debt.

By 2010, people will realize the thought patterns of the bubble, the religion of real estate, are no longer operative. As this slow process of change grinds forward, people will start thinking in terms of taking on manageable debts with an eye toward paying it off to build equity the old fashioned way through retiring debt. This will be a big change for thest-only loan, and in 20-30 years when they went to sell it, they could take the profits to fund their retirement. It is thinking like this that will change. Instead of buying a house they could afford, people borrowed 6 times their income with an interest-only loan, and they have no funds left over to save for retirement (or anything else for that matter.) In ten years, they may still be still underwater, and they will either lose the home or struggle with a fully amortized payment on a 20-year schedule.

There is a silver lining in a price decline, and the rebalancing of household finances will be a great boost to our economy. Crushing debt service is like a tax that takes income out of our local economy and sends it to investors in far-away lands. When this money stays home, people have more money to spend on local consumer goods. None of this will happen quickly, as the lingering effects of the Great Housing Bubble will be with us for some time, but in the end, house prices will be affordable, and the economy will recover, not through a Ponzi scheme of ever-increasing debt, but through working, earning and circulating that money in the local economy the way it is supposed to be.
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