The New York Times has recently started a series entitled The Debt Trap. It highlights stories of average Americans and their long and sad trip down the path of bankruptcy, ruined credit, foreclosure, unemployment, etc. and examines how America's fascination with material things and the banking industry has contributed to this expanding phenomenon. I found the article about Ms. McLeod heartfelt and emotional, and happy to see her take responsibility for the majority of her poor economic decisions. The question remains how is this situation prevented in the future, and I'm particularly concerned with my generation. How much does the average mid to late 20 year old know about interest rates (variable vs. fixed), what the APR stands for at the bottom of their credit card statement or how much of their salary they should invest in their employer's 401k? I'm afraid the answer might be a lot less than they should and only slightly more than their parents.
As home prices spiraled out of control over the past 5 years, the idea of owning a home seemed to be a very distant possibility, only compounded by my unwillingness to leave L.A. and its expensive real estate. I remember at my previous job doing economic research, my boss was shunned by many in the field for suggesting in 2005 that the balloon would bust and it would be bad. Three years later his predictions are held to be more than accurate, as foreclosures increased in the L.A. County 261% this quarter in comparison to 2007 figures. Although prices are decreasing my favorite economist Paul Krugman believes they have a long way to go before they stop. And as this may sound like my opportunity to begin my foray into real estate, the credit crunch may prove securing a home loan near to impossible.
In the past, families' wealth laid mainly in their home and other real estate purchases they made. The equity was used to finance education for their children, improvements to the property and even pay for unexpected events such as medical crises. With home equity eroding and the prospect of owning a home for renters becoming a distant goal, I wonder if my generation will be able to accrue true wealth. At the same time, my need for new clothes, shoes, dinners with friends, drinks after work, and trips abroad never seem to subside. I can only hope my reading of the economic tea leaves will bear fruit in the long run and I too will be able to climb out of the Debt Trap once and for all.