Consumer debt average falls in 2011 – An insight into the phenomenon

2011 was a good year for consumer debts. Consumers on average reduced their credit card debt by 11% last year. In 2011, the average credit card balance was $6,576, while the average credit card debt balance from 2010 was $7,404, according to CreditKarma.com. These results were based on data taken from 300,000 consumers. The main reason for the decline is weak consumer confidence, people were choosing to pay with cash rather than risk further debt.

Along with this, banks continued to tighten their lending limits and reduce the amount of credit available on credit cards for many existing customers.

In 2010 the amount of debt consumers owed eased after slipping by 7% during that year. However, it is being anticipated that this positive trend might not last very long. The economy is looking to rebound, and as a result debt is likely to increase as well according to experts. The major impetus behind this will be the loosening of credit requirements. According to Ken Lin, the CEO of CreditKarma, America is currently at the bottom of the debt trend.

Here is a look at the debt situations in some U.S. states:

• Wisconsin consumers had the lowest average credit card debt ($5,062) in 2011.
• Mississippi and Alabama recorded the largest balance declines - residents in those states reduced their balances by 23% and 16% respectively.
• Alaska had the biggest average consumer debt ($7,937) - closely followed by New Hampshire and Connecticut.

Some trivia about debt in America:

• The national average for mortgage debt remained steady at $173,876.
• The most mortgage debt was carried by Californians ($313,749 per person).
• West Virginia had the lowest average mortgage debt at $104,279.
• Mortgage debt rose 12% in South Dakota and dropped 6% in Nevada.
• The only debt type that increased was auto loan debt. That rose by 2% to an average of $15,504. The biggest rise was seen in Alabama, where auto debt rose by 30% to an average of $20,996.

About the author:

Rick Murphy is a contributory writer associated with the Debt Consolidation Care Community and has written several articles for various financial websites. He holds his expertise in the Debt industry and has made significant contribution through his various articles. To get debt related help visit: debtconsolidationcare.com/debt-settlement.html

The Mortgage Refinancing Catch-22

Although mortgage rates are extremely low, most existing homeowners are not able to take advantage of them due to stricter standards and reduced equity. Because the borrowers who are able to refinance tend to be the best qualified and least likely to be in trouble, many homeowners who currently have ARM loans will not be able to refinance as rates go up and will default as their payments become unaffordable. See the following post from Expected Returns.

The government has been active in purchasing agency debt and artificially pushing 30-year mortgage rates to 5%. For the 1 in 4 Americans who are underwater on their homes, this should be good news. Unfortunately, very few are able to refinance and benefit from low mortgage rates. From the WSJ, Borrowers Miss out on Billions in Savings:

The Federal Reserve has pushed mortgage rates to near half-century lows, but millions of U.S. homeowners haven't benefited from that because they can't—or won't—refinance.

Falling home prices have left many owners with little or no equity, making it harder to qualify for refinancing. Moreover, stricter lending standards and higher fees by banks and mortgage giants Fannie Mae and Freddie Mac and declining incomes have made it tougher and less attractive for borrowers to seek new loans.

The government has done pretty much everything to bail out speculators, at taxpayers' expense, who gambled on homes that supposedly never go down in value. The bail outs obviously are having very little direct effect on the housing market. Existing homeowners are unable to refinance at low rates, and as I mentioned recently, new home sales are cratering.

Keep in mind that new and existing home sales tend to rise and fall together in close correlation. However, we are now seeing a growing disconnect between new and existing home sales, which strongly suggests that existing home "sales" are of the distressed kind. This is why home prices are coming under pressure even with massive government intervention.

The last time mortgage rates were at current levels, in 2003, refinancing activity hit $2.9 trillion, according to trade publication Inside Mortgage Finance. Last year, refinance volume reached $1.2 trillion, the highest amount since 2003 but not nearly as much as expected, considering how low interest rates have fallen.

Traditionally, borrowers have an incentive to refinance when they can reduce their mortgage rate by one percentage point or more.

Borrowers who are refinancing tend to be those who need it least. Fannie and Freddie refinanced 4.2 million borrowers last year. On average, borrowers who refinanced through Freddie Mac saved $2,600 annually. But the savings on the whole have gone to "very, very good credit borrowers and it really isn't going very far down the credit spectrum," said Michael Fratantoni, the head of research and economics for the MBA.

Since refinancing is being extended to only the most prudent borrowers, the housing crisis, which is a product of the imprudent, will move ahead on schedule. It should be clear at this point that banks won't extend credit in an environment they still perceive to be weak.

Understand that this is a very tenuous situation. There are a wave of option ARM resets coming due, and I suspect many homeowners are counting their lucky stars since their option ARMS are resetting at a low rate.

Once mortgage rates start rising, there will be a mad rush to refinance and lock in low rates. Expect these homeowners to be blocked from these attempts, which will force them to foreclose as their mortgage payments rise exponentially.

The following chart showing the wave of resetting loans suggests that the next 2 years will be very challenging for housing.



Homeowners got way too overleveraged for this crisis to be cured by lower mortgage rates alone. In reality, the only cure for lower prices, are lower prices. The government must allow people to default so we can clean up all the bad debt from the system and transfer ownership of homes from weak to strong hands. This is the only logical thing to do, and the only thing that has worked historically.

Instead, we are creating zombie banks and a weak credit environment, which translates to a weak economic environment.

This post has been republished from Moses Kim's blog, Expected Returns.

18 Percent Of Mortgaged Homes Now Upside-Down

18 percent of mortgaged homes nationwide are now upside-down, according to a report released today by First American CoreLogic, an affiliate of title insurance and real estate services company First American Corp. 64 percent of those homes were in seven hard hit states: Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio. According to a Reuters article:

...states with large numbers of homes with negative equity either had
rapid price appreciation, many homes bought with subprime mortgages or as
speculative investments, steep manufacturing declines, or a
combination.

Nevada was hardest hit, where mortgage borrowers on average owed 89
percent of what their homes were worth, and 48 percent had negative equity.
Michigan was second, with an 85 percent loan-to-value ratio and 39 percent of
borrowers underwater.

David Wyss, chief economist at Standard & Poor's, predicts that home prices nationwide will fall another 10 percent before bottoming late next year, according to a Reuters article. He states, "Things seem to be stabilizing in Michigan, but the big bubble states—Florida, California, Arizona and Nevada—are still very overpriced." He also believes that though New York fared best in the report with only 4.4 percent of homeowners with negative equity, the state is still at risk the economy slows and leaves less money for housing.

Other experts go further by predicting the worst U.S. recession since the early 1980s. All 20 MSAs measured by the S&P/Case-Shiller Home Price Indices saw home prices decline between August 2007 and August 2008. In Q3 of 2008, foreclosures rose 71 percent to a record 765,558, according to RealtyTrac. The Commerce Department said the U.S. GDP fell at a 0.3 percent rate in Q3, according to Reuters.

Recent bank rescue plans have yet to spur lending and ease mortgage rates. This week, the rate on a 30-year fixed-rate mortgage jumped almost half a percentage point to 6.46 percent according to Freddie Mac. In addition, borrowing costs on adjustable-rate mortgages are expected to rise in the coming months. According to the Reuters article, "Last week, Wachovia Corp said borrowers with its "Pick-a-Pay" ARMs and living in or near Stockton and Merced, California, owed at least 55 percent more on their mortgages, on average, than their homes were worth."

Retirement Age Grows More Distant For Many In Wake Of Crisis

Late retirement is becoming a necessity for increasing numbers of older Americans amid the financial crisis. Before the turmoil on Wall Street decimated many retirement portfolios, in a survey conducted last year for a report released by the AARP last week, 70 percent of older workers said that they would retire late for lack of money. There is little doubt that this number has increased since the survey was conducted.

"With people's knee-jerk reaction in looking at both the economy and looking at their own finances, working longer may be the only way to get themselves to remain financially secure," said Deborah Russell, director of work-force issues at AARP. With retirement accounts taking a beating, a simple look at a retirement planning calculator will likely show that people need to work several more years to make up the difference. In addition more people are taking their money out of stocks and other investments out of fear and putting it into low yield things like savings accounts — which also lengthens the time needed to reach their retirement goals.

Late retirement complicates matters for the entire workforce and employers. Older workers may be costlier in terms of salary and benefits, and in an effect some have called "the gray ceiling" younger workers will have fewer opportunities as fewer and fewer elders retire at the previously anticipated age.

"A lot of younger people are waiting for those good jobs. To the extent that older people are not giving up those jobs, that's going to cause problems," said Richard Johnson, researcher at the Urban Institute in Washington.

If older Americans want to keep their jobs, they need to be assertive in doing so in the face of these many pressures on employers. Director of the Center for Retirement Research at Boston College, Alicia Munnell, advises, "Control what you can control. We can't do much about the craziness in the market, but you certainly can control, in many cases, how long you're going to work....We thought that was the right answer even before the financial crisis. Everything has just intensified since then."

Source: Reuters via NPR

Baby Boomers Boosting Resort And College Town Real Estate Markets

While the housing crisis continues to pound many regions in the United States, a small subset of college and resort town communities have continued to grow, largely because of their popularity among retiring and second home-owning baby boomers looking to spend more time in their favorite vacation destinations. Many of these towns, such as Flagstaff, Arizona, have seen growth rates double and triple that of the average rural small town, according to NPR. The demand for housing in small scenic towns- such as beach resorts, western ski towns and New England villages will only continue to grow as more baby boomers retire, creating the “demographic perfect storm” for growth in these areas, demographer Kenneth Johnson said.

Reactions have been mixed in regard to the increasing popularity of these picturesque destinations. Proponents argue that newcomers bring jobs and wealth, shielding these rural communities from economic downturn. Critics contend that the influx of wealthy baby boomers raises housing prices through gentrification and generates a surge in the overall cost of living for all residents of these small communities. The median house price in Flagstaff, for instance, has more than doubled in the past eight years. Rising house prices have forced many middle-income families to reconsider living in Flagstaff, resulting in backlash that has been paraphrased in a bumper sticker slogan popular in the region: “Don’t Phoenix Flagstaff.”

As increasing numbers of baby boomers approach retirement, it will be important for these small towns to consider plans to keep growth at a comfortable yet steady clip. While continued growth and strong real estate markets can be extremely beneficial for these communities, unfettered growth can have disastrous consequences, potentially destroying the small town charm that made them unique and desirable in the first place.

Is It Time To Reconsider The National Drinking Age?

Has the United States drinking age of 21 failed? More than 100 college presidents think it has, signing a proposal to lower the drinking age to 18 in an effort they hope will curb binge drinking and promote moderation on college campuses. Spearheaded by former Middlebury College President John McCardell, the Amethyst Initiative was drafted in response to a growing concern among college administrators that the high nationally mandated drinking age in the United States is promoting an unhealthy culture of clandestine binge drinking among college students. The initiative has been signed off by the presidents of prestigious institutions including the presidents of Duke University, Dartmouth College and the University of Maryland.

The initiative has stirred strong criticism from groups such as Mothers Against Drunk Driving, as well health and transportation officials, says the Washington Post. Groups such as MADD claim that the higher drinking age saves over 900 lives per year in drunk-driving related deaths. Other critics contend that college administrators are simply trying to transfer their responsibility in dealing with teenage drinking by putting the burden on parents and high school administrators.

I find the topic to be an interesting one, and see compelling arguments on both sides. As a recent college graduate, I can attest that the message that school administrators send to the students is often convoluted – underage drinking was explicitly prohibited on campus, yet administrators acknowledged that it is nearly impossible to control, and as a result often minimally enforced the policy. Whenever it was perceived by the students that the school was being forced to crack down on underage drinking, underclass students tended to respond in expected and dangerous ways, by locking themselves in dorm rooms and “pre-gaming” with bottles of hard alcohol.

Lowering the drinking age would also be beneficial to small businesses in college towns, particularly bars and music venues. During the 1970s, the small New England town where I went to college had several bars and other establishments catered to students, yet these businesses shut down when the national drinking age was enforced. As a result there is relatively little interaction between the students and members of the community, as well as few places for students to go that aren’t owned and promoted directly by the school itself.

Unfortunately for the signatories of the Amethyst Initiative, it is extremely unlikely that lowering the drinking age will ever be seriously considered on the national stage. The national drinking age is enforced by Congress by tying the 21 and over age to federal highway funding - it is unconstitutional for Congress to directly mandate a drinking age, yet does so by threatening to cut any state’s access to federal highway funding if the drinking age is ever lowered. With the vast majority of the voting public over the age of 21, few voters are directly affected by the drinking age, yet most voters have a real concern in maintaining federal highways.

It is unfortunate that there is little chance of a serious debate on this important issue, and I find it disappointing that groups such as MADD overwhelmingly oppose any real discussion. The decrease in drunk-driving related deaths is a significant and compelling argument for keeping the drinking age at 21 – yet how does this compare to injuries and deaths related to binge drinking, and have these numbers actually been increasing as the college presidents say they have? More importantly, how does a culture of binge-drinking and excess affect people later in life – would a lower drinking age and an emphasis on moderation result in lower rates of alcoholism in the future? These are important questions that I would hope could be addressed by these groups, yet fear that they will never be seriously discussed at a national level.

Women And Online Media

The number of visitors to websites catering to female audiences has doubled in the past two years, says the New York Times. The number of sites targeting women exclusively has increased by 35 percent in the last year, making it one of the fastest growing online sectors, second only to politically-themed sites. Websites such as Dooce.com, a humorous blog about motherhood, provide content similar to that of popular female magazines, but in a more informal and accessible format. The most popular sites command a high price for ad space and have become quite lucrative.

Investors have taken notice of the rising popularity of these websites and blogs; Comcast recently put down $125 million to buy Daily Candy, a popular fashion blog. Major retailers such as Wal-Mart and JCPenney have been using tactics gleaned from these websites to target products specifically to female audiences. For instance, Wal-Mart employed an online ad campaign on the Glam Media network (a collection of over 650 affiliated women’s sites) in the form of a quiz called “What’s Your Steak Style?” that featured online advertisements of Wal-Mart's oh-so-delicious steak collection.

The Times article also noted that the recent surge in interest in websites catering to women has not been replicated for male audiences. The article accounts for this by stating that women are attracted to the irreverence, humor and community on these sites, while men are often harder to pin down. While I am sure that there are often inherent differences between the websites that men and women choose to read, and that the irreverence and honesty of these popular blogs has helped make these sites popular among women, I am not convinced that these factors can completely explain the discrepancies between trends and male- and female-focused websites.

Historically, men have had a larger presence on the Internet. Websites that may have been male-centric have had more time to diversify, which makes it difficult to generalize a website as "just for men," rather than a more specific topic which appeals to either gender. As these sites catering to women continue to gain popularity, it seems likely that they too will diversify.

In addition, in the rapidly evolving ecosystem of the Internet, it is often difficult to sustain popularity over time. Internet users are finicky and lack loyalty to specific sites, not only expecting change, but demanding it. For instance, in the realm of social networking sites, Friendster begat MySpace, which begat Facebook, which begat LinkedIn—the current darling of the mainstream media (I personally think Mark Zuckerberg was a moron to not sell Facebook when he had the chance, especially given the recent fallout of Google’s talks to acquire the popular—yet likely doomed—news aggregator Digg.com). Once a concept online has been deemed “the next big thing” by traditional media outlets such as the New York Times, the trend is often close to the peak.

So now that I am done with that little tirade on Internet trends in general, I will comment that there are things to be said about the rapidly increasing popularity of sites catering specifically to women. Women account for 50.3 percent of the U.S. population, but their influence on the Internet seems only to be recently acknowledged. Understanding what makes certain sites popular, as well as how female preferences differ from those of men, will be crucial to understanding the direction of female-oriented websites as they begin to diversify and become appealing to more specific demographic groups.