Last I looked the debt mountain of the USA was on the increase with more and more money being piled on it as consumers seemed either unwilling or unable to curb their spending and lenders continued to lend money.

With the tens and tens of trillions of dollars being piled upon this consumer debt and the number of foreclosures at an all-time high it is safe to assume that first foreclosures and debt are related and second that both foreclosures and debt are a bad thing.

Well, the truth is that the first assumption is right and the second assumption is wrong. Yes, foreclosures are directly related to rising debt. As people borrow more and more their ability to repay it becomes less and less as their margin for error gets thinner and thinner until it vanishes completely. At that point they just need one bad experience, one bad deal or one bad incident in their life and their ability to meet their borrowing commitments becomes severely compromised.

So far so good. Debt can lead to foreclosure and the two are related but not in the way that might be immediately obvious. Let’s examine the second assumption that borrowing and foreclosures are bad.

Borrowing happens because lenders assess individuals and establish that they can pay back the money they borrow. So if borrowing is on the increase this means that the economy as a whole is booming as there are then a lot of consumers who are able to buy credit. Rising debt is not as bad as falling lending which actually signifies a reduction in consumers’ ability to buy credit and a possible shrinking of the economy.

Foreclosures are not bad for the same reason. They release back into the market tools, for lack of a better description, for tapping unspent power. So, let’s say if home-owner X is unable to make payments on house Y, then house Y which is frozen in the market, is released back into the general housing pool at a reduced price, it is then snapped up by someone who would not otherwise have spent that money because they could not afford to buy a higher-priced house and the cycle begins again.

For those predicting dark days for the real estate market as a whole I need to say that while this may seem to be a bad phase to be in it is part of the natural cycle we undergo as the real estate market corrects itself and it will soon be over and the better days of real estate as a fantastic form of investment will come round again, making real estate a sound form of investment once more.