Outstanding debts, largely hit a brick wall and are being written off by many banks and lenders.
According to the Wall Street journal, the over all household net worth has gone up slightly in the first quarter of 2011, while debt is moving lower. The rise in the average wealth of households including stocks, bonds, and other assets such as real-estate minus debts such as mortgages was largely caused by a rise in stock prices. The recent stock market troubles brought about by the ending of QE2 will likely paint a different picture once the second quarter numbers come out.
Outstanding Debt Hits a Brick Wall
In February, the Federal Reserve Bank announced that credit card debt had dropped significantly from 2008 summer highs. The report said that credit card debt fell by 15 percent while car loans fell 12 percent and mortgage loans dropped 7 percent. The Federal Reserve Bank also stated that the percentage of income going into savings also increased 3x the rate in 2007.
The reduction in consumer debt is likely because people are scared by the drop in home values. The housing market continues to be soft which makes people want to pay off their mortgages and avoid taking on new debts. The other major factor is the over-all tightening of credit and lending. Banks and credit card companies are now extremely cautious. In addition, many banks were forced to take charges and write off large amounts of unpaid debts. Large numbers of people have been defaulting on their mortgages as well as car loans and other debt. All these factors combined to show a reduction of consumer debt in the first part of the 2011.
The economy does show signs of slow improvement with a few thorns holding it back. One of the missing factors is of course jobs. With the productivity numbers holding strong and even increasing, there is no incentive for corporations to hire beyond what is absolutely needed for day to day operations.
Foreclosures and loan defaults continue to plague the economy. The housing market will likely stay depressed until we can see foreclosure numbers dwindle down significantly. Lending and credit will also need to open up to see a rise in real estate values. Now with the stock market floundering, the general economic optimism is muted.
It’s nice to see the general level of outstanding debt sinking lower, but the sad truth is much of this has been due to loan defaults and foreclosures. It’s not pretty, but it’s an unfortunate yet necessary step towards cleaning out the books and rebuilding the countries financial system from a stronger foundation.
The same is true for personal finances. As individuals we all need to take the time to wipe the slate clean and get a fresh start. For some this is obviously easier than for others, but it’s a healthy step in moving beyond the troubles of the last few years. We cannot build a castle upon a wobbly foundation. Now is a great time to dig down to bedrock and place some secure footers for your financial foundation. A proper support will allow us to build our wealth and overcome any set backs we may have experienced.
