John Philip Mason is a residential appraiser with 20 years experience and covers the Hudson Valley region of New York. He’s a good friend and a true professional who believes that all appraisers need to have a macro-economic perspective in order to be effective. This week, he gives new meaning to the word “indebted” in Solid Masonry. …Jonathan Miller
I have a confession to make. I can’t float. As a kid I remember swimming lessons at camp and there was this lovely young instructor (and yes, I had a bit of a crush on her). She would hold me up as I lay on my back; assure me with words of encouragement (just relax, I’ve got you, etc.) and suddenly her smile would disappear from view as I sank like a stone towards the bottom of the lake. Now many years later my wife (and yes, I have a bit of a crush on her, too) insists it’s just a state of mind and all I need do is “think light thoughts.” Now I’m not 100% sure if this is why, but to any parents out there with very skinny kids, just trust them if they tell you they can’t float.
Which brings me to a question regarding debt in America, If we stay relaxed and we think light thoughts, will that alone assure us we’ll be able to float? Well not according to Niall Furguson of the New York Times. In his recent article Reasons To Worry, Mr. Furguson indicates why we as a nation may lose sight of the reassuring smile as we sink towards our own murky bottom. I highly recommend reading his piece, for it left me with the sense that even if his facts and conclusions are only partially correct, we may be faced with a very dark economic future in this country. In it he touches on the various aspects of debt in America, including:
- Consumer credit in the 1960’s and 1970’s averaged less than 13 percent of G.D.P. In the past 10 years it has climbed to around 18 percent.
- Foreign ownership of the U.S. federal debt passed the halfway mark in June 2004. About a third of corporate bonds are now in foreign hands, as is more than 13 percent of the U.S. stock market.
- According to calculations published by Barron’s in February, over the next two years the monthly payments on about $600 billion of mortgages taken out by borrowers in the so-called subprime market (those with checkered or nonexistent credit histories) will increase by as much as 50 percent.
- The most important lesson to be drawn from the history of debt is this: It’s not the absolute size of your borrowings that matters. It’s not even the relative size in relation to your income. The crux is whether the interest payments you have to make are more or less than you can afford to pay. And that, in turn, is a function of whether or not the rate can move, whether or not your income can change and whether or not inflation can help you or hurt you. On this basis, both subprime American mortgage-holders and a distinctly subprime administration may find the months ahead more painful than they anticipated.
And since none of this can be good for real estate markets, I have to ask, is the U.S. economy floating or sinking in debt?