A major survey released by the think tank Demos provides some important new insights on how average American families are using credit cards.
The implication is hard to escape: many middle- and low-income American families are using consumer credit as a way to weather fluctuations in their finances.
That all portends "payment shock" for those with adjustable-rate mortgages whose loans are due soon to adjust, said Javier Silva, senior research and policy associate with the public policy research group Demos in New York City. "Lots of ARM customers are experiencing payment shock already, and we're only see the first wave of adjustments upward," Silva said. "People didn't understand how much their interest rate could rise, or were unprepared for it. I'm not surprised that we're seeing rising foreclosures.
According to Javier Silva, a senior research and policy associate with Demos, a New York think tank and public policy organization, homeowners' equity fell from an average of 68.3 percent to 55 percent between 1973 and 2004. Americans now own a smaller stake in their homes than they used to. In the 1950s, they owned nearly 80 percent.
If real estate appreciation slows or declines, homeowners without equity that is firmly established may find themselves owing more than their houses are worth.
According to a Demos study, Americans from 2001 to 2003 cashed out $333 billion in equity from their homes. Many did so to pay off credit card debt and finance ongoing living expenses -- both good and noble financial causes.
The study concluded that Americans own less of their homes today than they did in the 1970s and early 1980s.
Professor Robert Frank of Cornell University, the author of Luxury Fever, compares conspicuous consumption in an economy like ours to the military arms race, and we already know that's destined to end in mutually assured destruction.
The key to countering this headlong rush towards ever-more expensive disappointment is to switch from conspicuous to inconspicuous consumption.
