The U.S. has the biggest economy in the world and is entering its fifth year of growth. The housing market, which is expected to slow down this year and could bring the economy down with it, is the biggest risk. Many people bet that the housing market won't have a big crash, but will instead reach a plateau where prices stay the same. As a result, interest rates could go up, which could make money tight for a lot of families.
When the housing market doesn't grow quickly, it becomes a buyer's market. People will have a lot of houses to choose from, which will stop the value of the homes that people already own from going up. Most homeowners won't have a problem with this because they have standard fixed-rate mortgages and just have to wait until the market gets better. People with unusual 5-year arms and interest-only loans could be in a lot of trouble, especially if interest rates go up.
David Rosenberg, a U.S. economist at Merrill Lynch, said, "I think one of the main risks is whether or not home prices fall and how that will affect the savings rate and personal consumption growth, as we have already seen in the U.K. and Australia" (Wolk, 2005).
The amount of money people save is a bigger problem. Because it's so easy to get into debt today and most families have borrowed as much as they can, many people whose interest payments will go up may stop paying them. Due to the increased risk of lending money, this default makes the interest rate go up even more. In the end, a lot of people won't be able to spend or save money, which could be bad for the economy as a whole.
The best way to avoid falling into these traps is to put more money down on your house when you buy it. This gives you a safety net in case you need to sell it quickly. The second step is to not carry any balances on credit cards, home equity loans, or charge cards. Last, only get mortgages with fixed rates.
