HOBOKEN, N.J. -- While the housing bubble burst some time ago, it will lead to a second implosion soon, according to Richard D. Manning, director of the Center for Consumer Financial Service at the Rochester Institute of Technology.
Since the early 1990s, the growth of U.S. household debt has soared to unprecedented levels, from less than $4.0 trillion in 1990 to over $13 trillion in 2008. During this period, home mortgage debt grew from a total of almost $2.5 trillion in 1990 to nearly $10.5 trillion today. Similarly, consumer revolving or credit card debt quadrupled from $239 billion to about $950 billion today.
Manning believes that the growth of U.S. credit card debt is substantially underreported by the official statistics due to the tremendous volume of mortgage refinancings that were transacted between 2001 and 2005. He estimated that at least $350 billion in consumer credit card debt was paid off through mortgage refinancings, home equity loans and cash proceeds from the sale of real estate over this five-year period.
"This is especially important, since many American families have become dependent on the equity in their homes to finance their household expenses and are now facing rising credit card balances with increasing interest rates," Manning said. And, with nearly two million variable-rate home mortgages scheduled to reset to higher interest rates over the next two years, Manning foresees an impending consumer-led recession that will precipitate the loss of tens of thousands of jobs.
"Credit-strapped and debt-burdened households could trigger record levels of loan defaults and consumer bankruptcy filings over the next two to three years as the 'double financial bubble' implodes." The "double financial bubble" refers to the irrational exuberance of the housing bubble of 2001--2005, which unrealistically increased lenders' perception of consumer debt capacity, he added.
"As banks more aggressively marketed consumer credit cards in the early and mid-2000s, the underwriting assumption was that consumers' greater home equity wealth would miraculously absorb rising revolving debt," Manning said." "By essentially disconnecting consumer debt capacity from household income, the only way for American families to avoid financial insolvency was to sell their homes and either rent or trade down to pay off their unprecedentedly high consumer debts."
"For those households that did not recognize that the U.S. Federal Reserve's low interest rate economic policy had essentially suspended the macroeconomic laws of gravity between 2001 and 2005, the bursting of the double financial bubble entailed the disastrous reality of enormous mortgage payments and escalating credit card debts."