The problem is moving into a large debt at a variable rate. If the rates jump then the debt can easily become unsustainable. The problem is a bit less in most of the US where creative finance is less common and 30 year amortization on fixed rates is the common situation.
The problem with your scenario is the maxing out of the plastic in the first place. Many of these folks find their plastic load to be just as high in a little while. In the US the levels of plastic available are silly.
The thing is that there's a price to be paid for moving one's debt onto the house and that's that the house is put at risk if the debt can't be paid. In the circumstances that we're discussing, it transpires that the average yank now not only has a higher debt to equity ratio than when the bubble started (and it's climbing because the majority of new buyers now either have no deposit or borrow it elsewhere) but their cash liquidity is down to 3 weeks of earning power rather than the recommended six months. Any interruption to wages for a month will put the average Joe behind with the mortgage and ultimately at risk of losing the house. That's a big price to pay for putting a chinese meal on the credit card.
Have a look at this: it's amusing and frightening:
A huge number of Brits are one currency crisis away from losing their house. If we did an Iceland and were forced to hike rates to 11.5%, most folks would be unable to service their debts.
Not true anymore. More than half of new mortgages in the uS in the last two years have been low introductory rate VBR mortgages, or something even more exotic like interest-only or negative amortisation (you don't even pay all the interest). That's alongside folks taking 100% loan to value or borrowing the deposit via another loan. Now that some folks are being reset from 2% interest to 6.4% interest and are being required to start making capital repayments, they're looking at tripling or quadrupling of their mortgage payments and were already overstretched. It's not panning out as pretty...
FoFP
Many Icelanders would also be forced to sell their homes if the interest rates were as high as that, the interest rates on property here are between 4 and 5.5 %, it is normal consumption loans and overdrafts that have higher rates of interest.
Maybe the government should remortgage the island to get better rates on its loans.
FoFP
So? Name a time when you couldn't have said;
"A huge number of Brits are one currency crisis away from losing their house. If we were forced to hike rates to , most folks would be unable to service their debts."
Iceland has one of the highest credit ratings in the world, it cannot get any better rates. The interest rates have been raised because the inflation is moving upwards, a result of an expansive period with huge investments in heavy industry and hydro-electric power among other things.
Except that most potential buyers would also not be able to service the increased interest rates. This and the large number of houses on sale would probably force a considerable price crash.
As an aside, the financial institutions make considerable profits with the current interest rates. If the interest rates were raised substantially, many borrowers (both mortgage and credit card) would default and the institutions would not recover the loans. So, it would appear not to be in the financial institutions interest to make large increases to the interest rate.
It only makes a difference if the house is protected against unsecured creditors.
A debt to equity ratio really makes little sense. The issue is the carrying power of income in relation to the debt.
As far as liquidity is concerned the issue there is what can be done to cover expenses while you liquidate assets. Life has changed over the years and it depends on how much of your short term borrowing power you have used. I doubt that anyone sensible has 6 months earnings in liquid assets.
While running up debt to sustain spending is questionable you will not face foreclosure in 1 month. It does take a while. Even with government guarantees for loans lenders do not like the mess if they have some hope of recovery. Now 6 months without a job and many will be in trouble.
They will keep going up until they crash and then they will go down.
another nostradamus lookalike.
No his statements are meaningless and cryptic. Mine above is simply meaningless. It is intended to fit with what this thread has become.
Ah! I understand, sarcasm. Sorry, so used to the level of predictions being similar to that I failed to recognise it :-)
[snip]
What is the significance of this figure? All that means to me is that people buy, on average, more than four homes in their lifetime.
5.6 percent? Is that really a problem?
Hmm, so your reply is just in my imagination?
Not going to debate historical facts but there are many, including you, who for years have made claims there was to be either a house price crash or a credit bubble burst. It hasn't happened but I suppose if you say it often enough you are going to get it right.
They may go down but without it being a crash
Yeah, you're cracking up live on Usenet, Slimey - Again !
Only if there is a prior drop off in the buy to rent craze in the UK. There appears to be so much property involved that any perceived threat to profits from rising prices would bring enough property onto the market to cause a reasonable crash.
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