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The De-leveraged Consumer

As US consumers have paid off revolving credit card balances and been freed from large amounts of housing debt through foreclosures and short-sales, the average US household balance sheet has been deleveraged.  The Federal Reserve releases information on Financial Obligation Ratios (FOR).  For homeowners this includes payments on mortgage debt, taxes, insurance, auto leases/payments, and credit card payments as a percentage of disposable income:

The good news is that for both renters and homeowners, the financial obligation ratio has declined quite a bit from its peak.  The even better news is that homeowners are back to early 90’s, early 80’s type levels.  The bad news is that the spread between renter obligations and homeowner obligations is increasing.  Rents are increasing while mortgage rates are declining.  In fact, the cost of mortgage compared to the cost of rent has created the largest gap since the early 1970’s:

Buy a house if you can get a loan from a bank.


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4 Responses

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  1. JJ Butler says

    I know the point is rents are rising robustly as interest rates collapse. But the ‘financial obligation’ tells an incomplete story. The renter’s obligations end. The mortgage holder still has the always underestimated home maintaince; it doesn’t look like property taxes and insurance are included either. Nevermind homeownership is PERSONAL finance or rates are being held down by Bernanke’s bond buying. Strangely, housing is approaching a shortage!

  2. ChrisC says

    I do not doubt owning a home has become more attractive relative to renting. However, there are additional ownership costs beyond mortgage interest rate that is not captured in the chart. These items not captured can make or break whether owning makes sense for you today. It is not a forgone conclusion that you should own just because you can afford it.

    Additional costs of ownership include:
    1) Property Taxes – usually 1-2% of home value depending on state and county rates
    2) Maintenance – figure 2-3% for upkeep and updates to your home
    3) Mortgage Insurance – if down payment is less than 20%, usually 30bps – 90bps of loan amount
    4) Selling – when selling a home expect to pay brokerage fees of 5-6% of the home value

    Other costs that are not as easily quantified are:
    1) Mobility loss – because selling a home is more difficult and more expensive than breaking a lease it will be difficult and costly to relocate for a job
    2) Many people rent homes for their needs today, but when purchasing a home buy larger to accomodate future needs. This makes the home mortgage > rent regardless of the low interest rates on homes. You pay for extra space that may only be useful in the future.

Continuing the Discussion

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    […] The gap between rents and mortgage rates is dramatic.  (SurlyTrader) […]

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    […] Trader: The Deleveraged Consumer – As US consumers have paid off revolving credit card balances and been freed from large amounts of […]

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