Thursday, May 05, 2005

Macroeconomics of Debt

Gradually, the easing of credit availability to buy a home has had an effect of bidding up prices. When more people are competing in the market to buy homes, prices go up. The problem is that when people are allowed to allocate a higher portion of their income to mortgage payments, they have less to spend on other needs and wants. Housing is a need, but when it is excess of 25% of your income it begins to put you at risk of default if something goes wrong. What are the chances that something will go wrong in the next 30 years?

As more middle class families have been stretched thin, there are more two-income families. This is to help meet those higher costs. Families today are carrying more debt than ever, and that is why both parents must work. The mortgage becomes an albatross. Then when one of the parents loses a job, gets sick, or dies, it causes a financial disaster. This is detailed in a book by Elizabeth Warren, a Harvard Law Professor who has done extensive research on what causes bankruptcies. The book is called, "The Two-Income Trap".

The lesson? We need to recognize what we can afford in housing and other basic needs. The use of debt has a way of making us feel wealthier than we really are. When you make purchases that you must finance, it means you didn't have the money to buy it. You feel richer once you have possession of the item, but it has strings attached. To be good stewards of what God has given us, we need to know our limitations and avoid borrowing. Doing so will give us the resources to get through the bad times without falling into bankruptcy.

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