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Record low equity suggests to me that people will be more likely than ever to just walk away from their homes and stick the bank (or the hedge fund client) with the bill.
Banks lent the money to the overleveraged hedges.
"Even though prices have risen dramatically in recent years, the percent homeowner equity has fallen significantly (because of mortgage equity extraction 'MEW'). "
I agree MEW a larger factor, but:
If every new buyer in history used an 80% loan plus 20% down, and there is a premium for new construction, plus an added premium because the new homes are being built larger, then there would be some natural decline in Home equity.
The conditions I set here are obviously not universal, but I point out one effect that would create a negatively sloped equity curve in a stable market.
It would be intersting to know what valuation model they used to value the homes. Of course the decloines are not over, but I don't think the valuation models have caught up to the declines yet.
In case anyone is interested, I just put up some more charts showing corporate debt from the Flow of Funds Data (and fixed some minor errors in my previous charts, they were a bit rushed, d'oh!).
this is interesting. they are guaranteeing all of northern rocks deposits. isnt the smart thing to do then, to draw all funds out of other deposit entities and transfer it to northern?
Government guarantees Northern Rock funds - Telegraph
I really wonder to what degree you're going to see people just walk away from their mortgage. No matter what the economic sense of walking away from your mortgage is, people aren't exactly going to be jumping at the chance. I mean you're essentially hitting the reset button on your life and accepting a 10 year credit moratorium. Plus these are their homes we're talking about. I'm sure the absurd subprime loans and some ARMS will lead to this. But I'm betting alot more folks take the bologna sandwich and "please lets just make a deal" tact that lets them stay.
I can't imagine being faced with a choice like that.
Houston-
I'm sure the markets would love nothing more than a flood of capital INTO Northern Rock. I'm sure there will be a pull back on the guarantee (or a fundamental chance that raises the guarantee for ALL banks to 100%) soon enough. Right now they just need to get through the panic phase.
OT: Government will guarantee Northern Rock deposits
Government will guarantee Northern Rock deposits - Times Online
Houston,
great ex. of how moral hazard distorts mkts in unpredictable ways. reward the riskiest, most risklove institution.
Brian Pretti at Contrary Investor has a great discussion on this. His theory, which makes perfect sense to me, is that the consumer is getting desperate. how else to explain taking out a larger mortgage on a refi while house prices are dropping which shows up as decreasing home equity?
idoc,
When will we folks cracking their 401k's for current consumption - or are we already - how to get metrics on that?
another stat he showed was that the avg age of refis was increasing to about 3.5 yr currently which coincides with the teaser rate periods originated back in 2004. which also means that ppl who bought in 2005-06 are finding it much harder to refi due to the high risk loans they took at the peak of housing prices.
Name,
Good point. I would imagine that most new homeowners in the last few years started with considerably less equity than new homeowners of the past.
OT: Government will guarantee Northern Rock deposits
While in principal this doesn't seem like such a bad idea, what distrubs me is seeing the government changing the rules when it sees fit.
This rewriting of rules as a convenience is how money ends up getting printed.
This makes me much more concerned that people predicting the collapse of fiat currencies are correct.
These currencies exist solely because of the rules. Once it becomes acceptable to bend the rules you have the first nail in the coffin.
Metric -
Went looking at some foreclosures in Northern Cal this weekend. Saw what was once a 1/2 million dollar home, and it had been stripped. I mean stripped. Appliances, cabinetry, tile, carpet, even the awning and tile from what was once a back porch. There were gouge marks in the stucco around the back yard sliding glass door where he had (apparently quite repidly) pulled everything out. He then sawed out a section of the back yard fence and just loaded up on his way out. Nothing left but a shell of a house, dead grass, and a paint can full of used engine oil. Seeing is believing.
energyecon -don't know but i agree that would be a great indicator.
Empire State Mfg. Survey:
Consensus: 20
Actual: 14.7
Northern Cali,
You sure the past owner wasn't just a well to do former Humbolt County hippie who just wanted to leave the dwelling in as "green" a state as possible?
After all if you remove the furnace/ac and have all natural heating a cooling systems (ie no windows or doors) then you reduce the carbon footprint significantly.
What you called stripping is another persons bid for a sustainable planet.
Just a quick correction. This isn't the first time homeowner equity has fallen since 1994. The Fed revised earlier data, which now show a similar decline in Q3 of 2006. It's just the second decline since 1994.
To put this $6 billion loss into context, homeowner equity rose by $1.2 trillion in 2005, a year in which $735 billion in equity was extracted.
If Alan Greenspan thinks that's sustainable, I have a book to sell him.
energyecon - I would look at 401K contributions declining first.
But those with 401Ks will be the last ones affected as the recession kicks in.
This weekend the media was reporting that Paulson would fly to London on Monday and Monday the UK makes a statement to guarantee NR depositors and end the panic. Makes me wonder if the UK or the US is behind that guarantee.
CR,
Stupid technical question.
Household percent equity was at an all time low of 51.7%.
Is that: 1 total housing equity divided by total housing value or 2 summation of individual housing equity divided by individual housing value?
I strongly suspect the former for two reasons. Firstbecause it is easier and second because if the latter the number would look far different. With 1/3 of all housing coming in at 100% and another 20-25% having been purchased 10 or more years ago it looks like a sizeable portion of the remainer would need to have large percentages of negative equity.
Either way the distribution of debt makes this situation far more dire.
When will we folks cracking their 401k's for current consumption - or are we already - how to get metrics on that?
Does the "take a hit of MEW to get a down payment on a Harley, ski boat and an RV to tow them" set even have a 401k to tap?
The prospect of taking anything out of retirement accounts shocks me. Why on earth (barring a life-and-death medical situation or something) would you move funds out of a bankruptcy-protected account if you're in financial trouble?
Robert Coté,
I agree that the distribution of debt makes things more dire (and cloudier).
On the one hand we have the savers/investors who have cleaned up for the past 20+ years. There are MANY millionaires now.
On the other hand we have the spenders/borrowers who have embraced debt for the past 20+ years. There are 20,000+ payday loan centers now.
To rely on the averages could be quite deceiving.
Homes are found in places like the rag Home and Garden
Houses are found at developments by Tol, hov,bzh etc...
M-F, for values, the Fed model is very close (if not identical) to the OFHEO estimates - so I think their valuations are a few percent too high already - and getting ready to fall.
Best Wishes.
Not everyone is cracking their retirement accounts. I have a 403(b) and just opened a 457(b). As a boomer, I max out with $22.4K per year per account. If I need more money, I will take some from taxable accounts if I need more money to live on. However, right now, my retirement accounts are only about 40% equities. I don't see that people over 50 can plan on taking money from retirement accounts for ongoing expenses unless they plan to work until they drop.
Name,
I'm not sure if I understand your point -- you say:
"If every new buyer in history used an 80% loan plus 20% down, and there is a premium for new construction, plus an added premium because the new homes are being built larger, then there would be some natural decline in Home equity."
If every new buyer in history put 20% down, (as a hypothetical) then the size or price of new homes should have no effect on total percentage of homeowner equity. 20% of 50K and 20% of 500K averaged between two homeowners still comes out to ... 20%
Unless, of course, we are defining "history" as "pre-bubble", in which case I would still argue that we would expect to see home equity increase as a percentage. Even if all new buyers were using 100% financing, say, five years ago, and home prices doubled in value in that time, barring any MEW or negative-amortization, all of those homeowners should now have greater than 50% equity.
The fact that total home equity has DECREASED in the face of such an historic run-up in nominal valuations speaks volumes about just how "Creative" the financing of the past few years has been, both with purchase loans and cash-out refinances, and just how big that iceberg might be below the waterline.
This weekend the media was reporting that Paulson would fly to London on Monday and Monday the UK makes a statement to guarantee NR depositors and end the panic. Makes me wonder if the UK or the US is behind that guarantee.
The operative phrase appears to be ...
But he added: "Should it be necessary, we, with the Bank of England, would put in place arrangements that would guarantee all the existing deposits in Northern Rock during the current instability in the financial markets. (emphasis added)
So it isn't an open ended guarantee, just something to break the cycle long enough for people to get a grip and go back to being complacent sheeple.
"When will we folks cracking their 401k's for current consumption - or are we already - how to get metrics on that?"
Dunno, but my 401k (Fotune 5) last month sent out a bulletin on the mechanics of hardship withdrawls - The first one I have ever seen, so I suspect it wasn't by coincidence. MEW is like crack cocain to many bubble live-on-the-edge types. Once that ran out the next straw is probably 401k money for that next hit to keep the game going....
FT.com
Darkness descending on the hedgies
FT.com | Error | Page unavailable
Anyone have a link to The Economist's mag cover picture of AG passing a stick of dynamite to BB?
On the one hand we have the savers/investors who have cleaned up for the past 20+ years. There are MANY millionaires now.
Here is a CNNMoney.com article about millionaire households in America:
According to a report by TNS Financial Services, there were around 8.9MM millionaire households in America in 2005, or almost 8% of the roughly 114 million households in America, up from 8.2MM in 2004, and 6.2MM in 2003 (2003 & 2004 numbers).
The definition for "millionaire household" was "net worth, excluding principal residence", but the article goes on to say that "[a]lthough real estate is not their sole source of wealth, it remains a staple for many. Forty-six percent of those surveyed own investment real estate like a second home or rental properties," and fewer than 20% own "in whole or part a professional practice or privately held business", which might hold its value while asset prices decline.
Of the top five counties in the U.S. with regard to millionaire households, three were Los Angeles, Orange, and San Diego Counties in CA, and another was Maricopa County, AZ - greater Metro Phoenix area - plus at no. nine was Palm Beach County, FL - all real estate bubble epicenters.
Integrate all that info, and my guess is that by 2010, we'll be back to having 6MM millionaire households in America.
Metrics -
good one. let's hope the stripping is sustainable. lol.
You don't have to withdraw money from a 401(k) to tap cash. At most companies, 401(k)s are the most effective borrowing tools a person can have.
You can borrow up to half your vested plan money or $50,000 (whicheve is less) at low net interest. You can repay the money whenever you want. Because loans are so easy, you won't see a consumer squeeze in 401(k) contributions but rather it will be hidden in higher loans. The loans probably already are rising.
If you have matching it's stupid not to contribute, especially if you are low income and qualify for Saver's Credit.
Reepicheep,
I suspect you may be right. The ones with the most also have the most to lose. Further, somebody is more than likely going to lose.
I've always liked the saying that the goal during a bear market is to lose less. Once you've dropped the "gotta make money now" mindset things seem to become clearer.
But what do I know? I dropped that mindset three years ago. Fortunately, I turned stagflationist though and it did not hurt me. Go figure.
The conditions I set here are obviously not universal, but I point out one effect that would create a negatively sloped equity curve in a stable market. - Name
I guess it all depends on how you define 'stable market'.
If the past houses were all 80-20 and were less expensive than now, their appreciation would have pushed their equity percent MUCH higher by now.
And if the majority were positively amortizing it would push the percentage higher yet.
And if MEW were minimal - or at least stable relative to appreciation & amortization... this factor would be a wash at worst.
Now pull out resales of older homes & purchase of new homes (at lower equity percentage)...
But remember the number of new & resales homes per year is small compared to overall housing stock inventory... In a typical year new and used combine for what, 10% of total homes out there?
Plus considering about a third of homes carry no mortgage whatsoever... and they appreciate too, at 100% equity.
The only way equity percentage of all homes combined could decline is if the smaller number of new homes at lower equity percentage have a larger influence on the net balance than the larger pool of existing homes supposedly at higher equity percent...
That is unless:
1) existing stock really isn't appreciating that much
2) existing mortgages really aren't amortizing enough
3) still an awful lot of MEW taking place
None of those would indicate to me a healthy or stable market.
rich,
Agreed on all fronts - however I believe the max repayment schedule is a 5 year amortization of the loan - so you have to be able to make the payments to utilize this approach.
Another thought occurs, that the failure to complete the scheduled loan payments results in an IRS ding - but those won't hit until tax time next year - wonder if there are any stats on that penalty.
You don't have to withdraw money from a 401(k) to tap cash. At most companies, 401(k)s are the most effective borrowing tools a person can have.
You can borrow up to half your vested plan money or $50,000 (whicheve is less) at low net interest. You can repay the money whenever you want. Because loans are so easy, you won't see a consumer squeeze in 401(k) contributions
Yes, this is easy to do... however, there's a big problem if you lose your job. You'll have to return all the borrowed 401K money or pay taxes on it (plus the 10% early withdrawl penalty, I would guess).
If they haven't changed it, that homeowner's equity figure usually includes homes owned outright. Therefore, if you exclude the 35% or so that truly own their homes, the equity of those with mortgages is slim and heading to none.
Once prices retreat to pre-boom levels this percentage will be solidly negative, and then you can stick a fork in the whole idea of "trading up equity".
You don't think people have already tapped their 401's?
Any way to overlay total value increase so we can see what has been toiled away... Doesnt seem like its that simple tho... hummm....
Dont get me wrong. I know the manure has impacted the rotary cooling device, but the drop in home equity since 1954 could easily be explained by 40% of homeowners owning there house outright, rather than 50% in 1954. These are not real numbers; I made then up as an example. Im pretty sure that fewer people own their home 100% today, than in 1954. The graph is nice to look at, but a shift in ownership would skew it far more than any real change in Joe Averages debt. Rather than depicting Joe Averages debt, the graph shows the averages of all the Joes. CR is a great web site and Im a long-time reader, but this graph only could have some relevance.