Quick Cash is More Important than Long-Term Investments
Lending policies stricter
Consumers are lacking quick cash options now that lenders are working with stricter rules. Prior to the recession, lenders were handing out loans to sub-prime borrowers. There were few restrictions and the loan products available were vast. Almost every consumer could find some loan company to provide the credit needed. Unfortunately, though it put many Americans into homes, it did little to assure that they had the ability to repay the funds. That’s what caused the lending crash and partially fueled the recession of 2008/2009.
The change in consumers
The hard choice that many Americans are being forced to make is whether to pay their credit card bills or their mortgages. It may sound unfathomable and a few years ago, it was. But in today’s tough financial times there are a growing number of consumers who are opting to pay down debt on credit cards. According to a TransUnion study, the percentage of Americans who are current on credit card payments but behind on their mortgages is increasing. In fact, it increased to 6.6% at the end of 2009 and that is up from just 4.3% at the beginning of the year. For those who are current on mortgages and late on credit cards, the data is opposite. At the end of last year that rate was at 3.6%, which is up from 4.1% one year prior.
What the numbers mean
The change in numbers is telling of where consumers are now that they have been through a recession. There was a time when the common perception was that any homeowner would do whatever it took to pay a monthly mortgage payment, even falling back on other bills as a result. Today’s homeowner isn’t following the same model. Experts are attributing the shift to home values. When the housing market bubble burst at the beginning of the recession, borrowers watched their home’s value decline. Some declined up to 40%, and that left them with “underwater” mortgages.
An underwater mortgage is a condition where the borrower owes more than their home is worth. Knowing they were underwater left many consumers with changing priorities. They believe that if they owe more than the home is worth, it may not be as important to make a mortgage payment on time. Rather, they use their quick cash to pay down debt. A study done by RealtyTrac showed that in today’s market, about 25% of homeowners are in the underwater position with their mortgages. The common feeling is what is the purpose of putting money into an asset that is just losing value—value that it most likely will never regain?
The lending bubble’s aftereffect
Another problem the lending crash created was a market that isn’t personally invested in their property. In former years, consumers had to put 10 to 20% down on a property. It helped to psychologically bond them to the property because of their upfront investment. During the lending spurt, consumers were allowed to buy properties with little to nothing down. That meant that there is no personal investment. Add to that the huge number of foreclosures and the loss of property just isn’t as scary sounding as it once was.
In lieu of the long-term investment
More and more consumers are joining the ranks of those prioritizing paying off credit cards, rather than mortgage payments. The reason can be attributed to a huge paradigm shift in the market since the recession. Consumers want quick cash options and credit cards offer that, not homes. Americans seem more focused on having ways to afford everyday expenses like food, gas and clothes than on long-term commitments.