Wednesday, July 14, 2010

Two Loans at One Time?

Did you hear the one about the bank that turned down a man for a home mortgage just because he was still making payments on a car loan?

Whether that story is true or not, it shows that attitudes about debt have changed. Five years ago, it was easy to find people who would assume that every household would ordinarily have monthly mortgage and car payments to make at all times. Now people are anxiously reconsidering this formula. The story about the man who couldn’t buy a car and a house at the same time has been repeated so often because people are anxious about whether they too may fall into an exception to the two-loan pattern. If you are in a single-income household or have some other not-so-special consideration in your financial picture, will you have to pay off the car loan before you can buy a house? And then, will you have to pay off the house before you can buy another car?

This kind of anxiety is making consumers hesitate. One measure of this is the rate of home mortgage applications, which fell last week to the lowest level in years, despite low mortgage interest rates. (On the other hand, it is worth noting that the number of new mortgages has not yet dipped below pre-bubble levels, which means that the housing correction hasn’t really started yet.)

Retail sales fell in June, defying my hopes for a summertime bounce similar to what we saw last year. The more telling report this week, though, is the news that petroleum inventories rose last week, yet another indication that, far from going on a road trip, people were staying home during the Independence Day holiday weekend. That in itself is an unprecedented change in U.S. consumer habits and attitudes. Petroleum inventories fell this week as people went back to work.

Imagine a shell-shocked man with a few pieces of paper in his hand, staring blankly across a desk and saying, “You mean, now I have repay all these loans?” That’s the new face of deleveraging, as consumer and some businesses realize they are stuck right where they are until they pay debts off — or at least, pay them down enough to restructure them.