Drowning in debt
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SCOTT JAGOW: A new report says the American middle class is drowning in debt. The Center for American Progress says debt increased 30 percent in a recent three-year period. It now makes up 108 percent of incomes. Yes, you heard me right. But as Chris Farrell tells us, people aren't splurging on big-screen TVs and exotic vacations.
CHRIS FARRELL: The study Drowning in Debt makes a convincing case that the reason why the middle class is in debt: 1. Buy a home 2. Send your kids to college. Those are the two big reasons. So the good news is, we're not in debt because we're shopping at the mall. The bad news is we are taking on more and more debt in order to have a middle class lifestyle, which I think the two pillars are own your own home, have a college education.
SCOTT JAGOW: So if housing and college tuition are taking a bigger and bigger chunk of that middle class income, is that middle class lifestyle under threat?
CHRIS FARRELL: Part of what's happening and the report makes very clear, we've been taking on a lot of debt at the same time that incomes 2001-2004 have been stagnant. And we all know this. The question is, is that a long-term trend, in which case we're taking out debt to try and still maintain our middle class lifestyle even though we know at the back of our mind that we're never going to make the kind of income to justify the debt we're taking on — or hey, incomes were stagnant for a longer period of time than we though but we're making these investments.And that's the key these are investments. Owning your own home is an investment. A college education is an investment. And they're going to pay off with time and the debt burden is going to ease because we're going to earn increased income. I'm in the camp that says, I think we're now seeing a turn in incomes.
SCOTT JAGOW: But is that debt load actually going to decrease? Because take a look at interest rates, they're going up and up and up.
CHRIS FARRELL: Well that's the real concern that this report is saying that interest rates are going to go up and, boy I tell you, it's a safe forecast. Those people that took out interest-only mortgages, you know, a lot of them are going to be in trouble. Anyone who put less than 10 percent down payment to own their own home, they're going to have a financial squeeze on them. The real question is, is that going to be the bulk of people or is it going to be the percentage of the market that really stretched toward the end with the interest-only mortgage and the adjustable rate mortgage and that they bought a bigger house than they needed to. I think those people are going to be squeezed, I don't think there's any question about that. Where I have some skepticism is that the middle class overall is drowning in debt. And that as the middle class falls deeper and deeper into debt that there's a financial crisis brewing. At that point, that's where I retreat.
SCOTT JAGOW: OK Chris thanks for your thoughts.
CHRIS FARRELL: Thank you.
Chris Farrell is the Marketplace Economics Correspondent.