Consumers are behind schedule in payments or have walked away from nearly $800 billion in household debt of all kinds — mortgages, credit cards, car loans, says Mark Zandi, chief economist for economy.com. "Household credit quality has arguably never been worse," he says.
That is a lot of write-offs. And we are still in decline mode. This still has a way to go before leveling off. What is propagating this downward spiral - job losses, equity losses and rising prices, as per the article -
•The housing downturn. Projected declines in house prices, home sales and housing starts are all worse than the housing collapses of the 1980s and 1990s, Zandi says. He projects a nationwide home price decline of 26% from the peak in 2006.
•A weakening job market. The unemployment rate has risen to 5.5% from 4.6% 12 months earlier.
•Higher prices. For people in the bottom third of the nation's income distribution, energy costs were about 11% of consumer spending in 2006 when oil averaged about $75 a barrel. Now, with oil around $125 a barrel, "You could argue that nearly half of their disposable income is now going to food and energy," Zandi says.
During the Great Housing Bubble credit was easy to obtain, people who never would have normally qualified for a house normally were somehow getting 100% financing. People were getting loans with payments that they could never afford. Lenders were giving loans based on valued assets with a mind frame that housing would never decline and people would never default.
Just for the counter-point argument to the state of the economy, the article threw in this closing paragraph -
Other economists are more optimistic. "Yes, we're seeing this erosion of household balance sheets," says Brian Bethune, chief financial economist for Global Insight. But, he says, consumers are making good choices: paying down debts, using less fuel and shopping at discount stores.Consumers are not really making these choices - they do not have the funds to do other things. Many people are adapting to the new market rules - less credit, no access to equity, and higher prices. These are not necessarily choices, rather external market forces.