Cr's projections on this have been right on for months. The smaller the equity the higher the risk of walk aways and the larger the threat to the solvency of lenders who hold this paper. The numbers do not lie!
I am guessing the 31% with no mortgage have their financial house in order with no interest or need for MEW. Does that suggest some substantial fraction of the other 69% will really be hurting when they (we) can't tap the equity machine any more?
I take comfort in my personal position at the bottom of the food chain. People have to eat and our biggest customer is Wally world.
OT-The market looks to be very manipulated and propped up right now, but that makes sense as the hedgies need to unload into the marketplace before the resistance levels are broken and technical selling trashes the markets.
The support levels should by all accounts have been broken by now, but that they haven't been indicates not true buying but most likely propping to prevent the fire selling into a technical rout.
Doubt it can be propped up too long, though. At some point the PWGFM aka PPT must run out of dry powder.
MLM, yes, we can get a decent estimate - and I try to put that up this afternoon.
Last quarter the percent equity was 33% (by my calculation) for homeowners with mortgages. But that was revised down in this report. I wouldn't be surprised it it's under 30% now.
I was at a seminar two years ago touting investing privatly in second mortgages. I wounder how all those excited people who were issuing privates second mortgages are doing today.
iceman, homeowners without mortgages. Sorry I wasn't clear - this has nothing to do with renters. About 31% of household home their homes free and clear.
I'm trying to picture a scenario where the US economy DOESN'T contract by 5-10%, and I'm having a hard time. If consumers were spending 102-105% of net income due to MEW and there's no more MEW, the most they can spend is 100%. Increased energy costs cuts the budget for everything else, and a good fraction of that capital goes offshore. Then J6P misses a payment on one of his credit cards, and they all go up to 28%. More interest charges reducing his budget for everything else. And this is the guy supporting 70% of the economy?
Maybe the best bet would be for 5% to BK and cut their interest payments drastically, renting instead of 'owning', and spending the difference between mtg and rent at the mall. But of course BK laws were recently tightened to make this more difficult.
Where is spending going to come from to keep the economy from contracting at 5%?
I was at a seminar two years ago touting investing privatly in second mortgages. I wounder how all those excited people who were issuing privates second mortgages are doing today.
Probably back at their day jobs as Starbucks barristas. Whoops, maybe not...
You can tell he knows he is trashing his reputation with these continuous "breaking news" BS segments. Guy looks and sounds like a prisoner of war being forced to read from a script. I almost feel sorry for him.
Hey, now. I know historical revisionism re: FDR is all the vogue now in some circles, but that man got us through a Depression, World War and probably prevented an outright Communist revolt in the U.S. The CCC also probably saved my dad from starving, which in turn saved me. He wasn't perfect, but not the demon some portray him as, either.
Ok, stupid question from a first time commenter and decided non-economist: "Household percent equity was at an all time low of 47.8%" 47.8% of what? Total equity? What does this number mean exactly (besides a sign of the apocoplypse like CNN would have you believe)?
I don't know if all of the decline in equity can be blamed on mortgage equity withdrawal -- although much of it can. During the last 12 years, there was a 5% increase in home ownership, and much of that was due to subprime lending. Many of these new homeowners used 100% financing, so if you add 5% to the total home ownership statistics and few of these people had any equity, that would have some impact on homeowner equity (how much I don't know.) There was obviously a great deal of mortgage equity withdrawal, but I am not sure if we can say all of the decrease in equity resulted from it.
CR said: "...This is just the beginning. If house prices fall 20%, households will lose $4 trillion in equity. If they fall 30%, households will lose $6 trillion in equity."
If the doomsday tone of this post is really correct, didn't this all start in 1952?
According to the "Household Percent Equity" chart, equity fell by an "alarming" amount from 1952 to 1966. Then it went sideways until the early 1980's, and began to make all-new multi-decade lows in the early 1990's.
So what? If this was a meaningful statistic, why didn't the U.S. economy return to the stone-age decades ago? Why is a sub-50% equity level the magic number level that's going to take us down now?
For all the grief the Bush Administration gets for spreading fear to achieve its Machiavellian ends, CR certainly gets an undeserved pass for doing precisely the same thing here.
But, but, but...subprime lending to low-income people was going to let more people participate in the American Dream of Home Ownership!
I was in the room when our own state Attorney General said it was important NOT to put Household International out of business, because that would make it harder for people to get credit...
Now you're telling me that people own less, instead of more? Looks like somebody miscalculated.
By the way, the drop in net worth is touted as the first in 5 years. Well, depends on how you do the math. The nominal drop in net worth is 0.9%, but tack on inflation and population growth, and real per capita net worth fell by about twice that much in Q4, and was down about 0.2% from a year ago.
I'm feeling optimistic. Lenders thought they could safely chain homeowners to massive mortgages, but the rules of society evolve just like individual genes and the fittest meme that has emerged is "it's okay to cut your losses on a bad investment even when it's your house."
Lending rules are changing to take this new social more into account. Larger and larger down payments. Tighter restrictions on credit. Any whiff of speculation and the points soar. Lenders will lobby Congress to pass laws making it harder to foreclose, or allow going after previously protected owner-assets in response. And the end result? No more housing bubbles for a long, long time.
Claiming that a bunch of Saudis based in Afghanistan attacking and killing 3000 Americans means we have to kill several hundred thousand Iraqis on the one hand, and reporting on the actual disaster created by the fearmonger in Chief are not equivalent.
Is there a breakout of total # of households, #/% renters, #/% own-no mortgage, #/% own-mortgage, to understand the total potential damage and where the battle lines for the bailout will be drawn?
I suppose I'm in the minority, but I don't view the long-term decline in home equity as necessairily a bad thing.
In a broad sense, homeowners are becoming more financially savy and realizing it's not efficient to tie up equity in their primary residence when they can use leverage to improve their ROE, much as businesses have always done.
Now granted, the past five years have taken this approach too far, as many unsophisticated homeowners got in over their heads. But longer-term, for the 80%-90% of financially secure homeowners who don't play games or speculate, leveraging up is a reasonable financial stragegy IMO.
In a recent speech in Washington, Charles I. Plosser, president of the Philadelphia Federal Reserve, suggested that the Fed's traditional role as an inflation fighter can be set aside in certain unique situations.
I believe we are in a situation where monetary policy cannot be made by focusing solely on inflation, he said.
But neither should the Central Bank be focusing solely on the threat of recession and the struggles of Wall Street.
On Tuesday Dallas Federal Reserve President Richard Fisher introduced some balance to the discussion when he said inflation is the greater threat than an economic slowdown. He plans to urge his colleagues not to cut rates further when they next meet March 18.
Yummy!!! I've been wanting to buy a house for some time, unfortunately the prices have been out of control as others here have noted.
Thanks to the bankers, my opportunity to buy post-depression seems possible so hopefully we'll see alot of banks and families go under so I can meet my price point!!! Alot of people may find my wishes disturbing, but only fishes and marks would pay 7-10X income for a property in any area. With that said, game on!!!
The U.S. economic and financial system is undergoing a very challenging period of adjustment, and we are likely to be living with a high degree of uncertainty for some period of time," he said.
He encouraged targeted support for housing to prevent further price declines and added that a fiscal stimulus package signed into law by Congress recently "will provide a meaningful level of support" that could add up to 1.5 percentage points to growth over the next few quarters.
The bottom chart is interesting... When houseold value goes up, mortgage debt goes up. But when it goes down, debt stays flat or decreases slightly. We can already see the blue curve falling while the red one is flat.
Falling value can happen easily (it's happening right now!) but falling debt can only be caused by paying it off or defaulting. We know that mortgage debt will not be paid off quickly. The only way for that red curve to fall in the short term is for a massive number of foreclosures to happen.
I'm not sure that decline in home equity has to be a bad thing either. From a financial perspective your house is a large, illiquid, unhedgeable, dollar-denominated asset. Why take all that risk? Extracting equity in the form of a cheap loan makes some sense to me. Though this does increase your leverage. If a cheap hedge was available then MEW becomes a no-brainer. Too bad we don't have an options market for the Case-Schiller index.
In my mind, the problem isn't the fact that people extracted money from their homes. It's what they did with the money after they extracted it that's the problem. ( i.e. they blew it on hookers and blow instead of investing. )
Tanta - I guess I won't have to post links to MarketMinder's comments or mention the performance of Fisher Investment's Global Portfolio any more since they are advertizing your your website.
Now I hate to add crap here, but can Tanta/CR do some numbers with GDP please??
Re: The realtors today also released their latest economic outlook, which foresees 1.5 pct GDP growth in the US in 2008, and 2.4 pct GDP growth in 2009. The group sees a scant 0.1 pct rise in GDP for the first quarter of this year, followed by slowly improving growth of 0.9 pct in the second quarter, 2.0 pct in the third, and 2.3 pct in the fourth.
That retardation is offset by this guys retardation: He encouraged targeted support for housing to prevent further price declines and added that a fiscal stimulus package signed into law by Congress recently "will provide a meaningful level of support" that could add up to 1.5 percentage points to growth over the next few quarters.
In terms of trillions, what are we talking here, isnt GDP around $13 trillion or so..I could be way off on that guess from the blue, but are we to assume from NAR and The Fed that they think we are going into a recession and then going to add a few trillion to growth and then, ignore the war debt, the housing debt the trillions lost on stock, bonds......anyone??
Thanks to the bankers, my opportunity to buy post-depression seems possible so hopefully we'll see alot of banks and families go under so I can meet my price point!!! Alot of people may find my wishes disturbing,
It's even better than you think. In the "post depression" period the last time around (1941-45) a lot of young men were living on military bases etc., which further reduces the demand for housing.
The Fed and all its staff need to be held accountable for every word thy utter and to be crucified. They need to be watched and analyzed and held accountable for what they have done and are doing to America!
The mainstream media has been a bunch of pussies for not being involved in the pursuit of truth and justice!
We should be thankful to have a blog like this which can help contribute to discussions and gather information in regard to what these crooks are doing.
Obviously a few words dont matter to them, but Americans have to take back America from these whores!
The fat man and the skinny man stand on the scale together and declare themselves average.
The 31% of houses with 100% equity are substantially less expensive than those carrying mortgages. Their "losing" 20% is $30-40k. The people who listened to Realtors® like John Lockwood in Sacramento last year and bought the median home are already experiencing $104,000 in losses. My modest crib is down may 8-10% y-o-y and that means the same $100,000+ loss to the national figures. See the potential cascade failure problem? A 10% price decline puts far more than 10% more mortgages underwater. Even if the distribution were linear (best case) a 69% price decline represents the same amount of money as 100% of the mortgages outstanding. We don't have to worry about anything like that. When own v renting returns to parity it become academic as to who owns the "house" or the paper. That's the lower limit.
REBear asked, "What happens to households with mortgage if price falls 20 or 30%?"
I'm probably over simplifying, but if home values decrease by 30% on average, then - on average - equity is completely wiped out for mortgage holders (if the equity % comes in under 30% as CR suggests). What does this mean? No 2nd mortgages, no HELCOs, complete loss of wealth effect from housing....it also implies 50% mortgage holders being "under water"....just to name a few. Quite a dire scenario!!
In the "post depression" period the last time around (1941-45) a lot of young men were living on military bases etc., which further reduces the demand for housing.
John Stark | 03.06.08 - 1:49 pm
JS -
If you go back to guys like Studs Terkel ("The Good War"), you'll read that folks talked about many areas with an acute housing shortage. Rents were way up as there was no construction of new units and there was a massive influx of workers into areas for war production.
My grandmother was in a small western PA town and there were boarders all over as people came in to work at a nearby war plant.
Sad to say I have a brother in law who bought at the top..who 3 years ago to the day told him to refi that IO-ARM and he never did...this September his ARM reset to the tune of $800 large...well here it is again 6 months later
( libor ) and another March reset is in his mail box...i truly feel for him...but he is a rebel type who takes advice form the local News Paper...so now I say nothing...but he does look a little grayer these days.
Are the 31% of households without mortgages are households that (a) fully own their homes and (b) households that rent.
iceman | 03.06.08 - 12:57 pm | #
the answer is (a). However those are generally smaller and less valuable homes than the ones with mortgages on them (mostly owned by little old ladies). By value about 25% of the housing stock is owned free and clear (i.e. they had a mortgage burning party sometime in the past). Since they are unlikely to start pulling money out of their homes, this means the housing ATM is totally smashed and will not be revived for a LONG time. Since that was running at 5-6% of disposable personal income for most of the last few years, that will be a big hit to consumption.
Seb asks "So what? If this was a meaningful statistic, why didn't the U.S. economy return to the stone-age decades ago? Why is a sub-50% equity level the magic number level that's going to take us down now?"
I don't think it's the sub-50% equity level itself that is all important, it's the fact that the trend coupled with potentially significant declining home values implies that equity will be nearly wiped out for mortgage holders...that WAS NOT the to 1966.
We are in serious decay folks, it starts with Bush and trickled down to trailer parks. Call it Rome burning or the new Russia, it's over baby!
Look at the retards in Vegas, which are as moronic as The Fed economics!
Almost 40,000 patients who visited a Las Vegas clinic have been told to get tested for hepatitis B and C, as well as HIV, after health officials say they found that nurses there were reusing syringes and dosing out contaminated medicines.
So far, six new cases of hepatitis C have been traced back to the Endoscopy Center of Southern Nevada, officials announced last week in shutting down the clinic. Five of those patients visited the facility on the same day, Sept. 21.
"Even if the distribution were linear (best case) a 69% price decline represents the same amount of money as 100% of the mortgages outstanding. We don't have to worry about anything like that. When own v renting returns to parity it become academic as to who owns the "house" or the paper. That's the lower limit."
I agree with you there. The only variable is what happens to rents. Do they also fall, and housing prices chase them down? Or do they rise and meet housing prices somewhere in the middle.
I think this will be a local variable. It is possible that rents in dense urban centers might rise, as renters cease "fleeing" to home ownership in the cheaper burbs.
But in urban cores that are overbuilt with condos, or bubble areas with limited economies and a glut of under-occupied recent development, rents could possibly fall. Link to a story from the Modesto Bee, where rents are flat and apartment vacancy rates are high:
Household Percent Equity chart is a little misleading.
I think someone pointed out already that if the homeownership increases rapidly, as it did in the last decade, you would expect this number to fall just because the new homeowners have very little equity in their homes, thus diluting the total. In other words, this decrease would happen even without the MEW's, etc.
There must be a way to normalize this data to take into account such effects.
bZb - it's true that a big increase in ownership raises the number of new owners with little equity. But the ownership rate has been falling for at least two years now (Census Bureau reports this quarterly). I don't think the effect should keep working as the ownership rate falls.
Cash-out refis definitely have something to do with recent declines in percent equity
I see nothing magic or significant about the 50 percent mark.
I think the significant fact still, after all the hoopla, is the deviation of prices from the norm. The under 50% number means that leverage increased slightly, but the drop in prices (when they revert) is what will crank that leverage.
I wonder what net leverage on gold or oil or wheat is today?
Homeownership rose along with home prices, therefore all but the very last to get in had "instant equity". Both trends have obviously reversed. Regardless, homeowner's equity has declined throughout the boom, and is accelerating through the bust.
Indy writes:
The national debt (9 trillion, not counting the entitlements) is now about the same as the remaining household equity (~50% of value)? Coincidence?
Indy, not quite correct, the $(T figure does include the debt held by the SS trust fund. Currently the SS trust fund is growing rapidly (apx $200 B a year). However in 2017, the growth stops and it starts to use the interest on the accumulated assets (aka the debt of the govt it owns) and somewhere around 2022 or so it starts to dip into principal. The principal is exausted in 2042 or so (based on the Intermediate case of the SS trustees report). For a really in depth look at this see Bruce Webb's site (dont have the URL handy but if you link to Angry Bear, from there you can then link to Bruce)
Your reaching is falling shorter and shorter of your grasp. Equating earnings & stock prices of going concerns to underwater borrowers is beneath you. Or maybe you are not the real Sebastian?
There is a very interesting extensive quote at Robert Reich's Blog by Marriner Eccles (Fed Chairman 34-48)that was posted on Sunday. History does not repeat, but it does rhyme, and this seems like Dr. Seuss to our current situation.
There's a new condo complex in Woodland Hills/Warner Center, that is now an apartment complex. Up until Dec 07, had a For Sale: Mid 300K. Drove by today, now leasing luxury apts. Granite counters, fancy appliances, etc. Everything you would NOT put in an apt.
I suspect in 5 years they'll be formica counters, GE basic appliances and mid range Price Pfister fixtures.
I think the KB homes condo development still building, not 200 feet down the same street, advertising for sale in the high $300's will have the same fate.
They may get above average rents for a short while. But I think supply will start to swap demand.
bZb said: "...There must be a way to normalize this data to take into account such effects."
There is, but the charts wouldn't be as "convincing.":)
Seriously, though, this is a weakness common to most of CR's charts, and sad to say, it's not because the normalizing data isn't available. My own pet-peeve is that so many of the housing charts (permits, sales, etc.) aren't adjusted for population.
Duceswild,
Thanks! For starters, i think we will either end up with a bunch of angry boomers or gen y. If homeowners are bailed out generation y will suffer. If the housing market is allowed to correct, boomers will be screwed.
Clyde said: "Your reaching is falling shorter and shorter of your grasp. Equating earnings & stock prices of going concerns to underwater borrowers is beneath you. Or maybe you are not the real Sebastian?"
Please re-read my post and what I was responding to. My point was that Americans endured and recovered from another major loss in a different asset-class, stocks, but those losses were recovered far faster than anyone believed they would be.
There's a similarity of bearish sentiment in the housing "debate" here, i.e., no recovery is possible in any time-frame or at the very best it is years and years away. The despair of a major low. JMO.
The support levels should by all accounts have been broken by now, but that they haven't been indicates not true buying but most likely propping to prevent the fire selling into a technical rout.
Doubt it can be propped up too long, though. At some point the PWGFM aka PPT must run out of dry powder.
Look out below.
Anonymous
at every price point along the market's graph, most big trust, pensions, and funds must be +90% in equities..
think about that technical feature for a few minutes.
Bob Dobbs - the thing is, if oil is really driven by demand and not a rush to a 'safe commodity', then as gas prices keep rising, we'll see an increase in housing density. I think that's only slightly longer-term. That means prices further out will take longer and longer to recover.
Sebastian, there is a big difference between the losses from assets in the stock market, and the losses on assets from the housing crisis. That difference is who has lost the equity. With the stock market, most of the wealth was held either by the well off, with a lower propensity to consume, or in 401ks, which are mostly not available for consumption.
The distribution of losses this time is very different.
There's one other difference worth mentioning Sebastian. In 2000 you got a margin call on your pets.com stock. In 2008 you get a margin call on the place your family is living in.
Visible signs? Out shopping today in Tucson. Nobody in Ace Hardware, nobody in Office Depot, and nobody in the supermarket to speak of. Parking lots about 2/3 empty. Will see how things are over the next week, but I think recession has gotten to S. Arizona.
If you go back to guys like Studs Terkel ("The Good War"), you'll read that folks talked about many areas with an acute housing shortage. Rents were way up as there was no construction of new units and there was a massive influx of workers into areas for war production.
My grandmother was in a small western PA town and there were boarders all over as people came in to work at a nearby war plant.
homedad43
No, I'm sure you're right, Dad. My point in my earlier post was that people shouldn't be too cheery about the prospect of a Depression. Even if you are positioned to take advantage of the financial opportunities that depression presents, we should be aware of the potential for destabilization that leads to war--as it did before.
During the war a lot of smart guys probably made money hoarding commodities, then died when somebody dropped a bomb on their heads.
Well, if lenders now own 52 percent and growing, then I guess they're really happy about that, eh? I'm sure they look forward to even greater ownership wealth coming their way.
Hey, I was at Home Depot in Tucson too and I saw one other customer - was that you, Chris? Also, I've never seen so many commercial properties available for lease. This will be one doozie of a recessio
There's a similarity of bearish sentiment in the housing "debate" here, i.e., no recovery is possible in any time-frame or at the very best it is years and years away
Sebastian, please.
I'm the biggest bear I know and I'm only another 10% drop from pulling the trigger on the house I'm looking at.
It (nominally) peaked at $628K in 2005. It's on the market for $500K now. If the listers drop that price to $450K, then I'm all over it since that is the price level I can afford, even though it's possible the property can return to its ~$380K groundstate, I'm not strong enough a deflationist not to worry about wage-price spirals start kicking up.
But the 2003-2006 appreciation was largely bullshit due to the insane lending practices that were allowed. I saw this same movie in Japan 1992-2000.
First?
I'm blushing
Cr's projections on this have been right on for months. The smaller the equity the higher the risk of walk aways and the larger the threat to the solvency of lenders who hold this paper. The numbers do not lie!
Note: approximately 31% of household have no mortgage. So the 50+ milllion households with mortgage have far less equity than 47.8%.
CR, is there any way to figure out what the actual distribution looks like?
The Sixth Cents
"I see dead banks"
Starring Bruce Willis as Washington Mutual
CR,
Are the 31% of households without mortgages are households that (a) fully own their homes and (b) households that rent.
... and the larger the threat to the solvency of lenders who hold this paper.
If they're still holding it.
Trouble runs down hill. Whoever holds the paper is at risk.
Homeowner Equity Is Lowest Since 1945
Congrat to Greenspan, the Bush admin, the crooks on Wall St. and to all the other scumbags that rob Peter to pay Paul and themselves.
may you all rot in hell !
I am guessing the 31% with no mortgage have their financial house in order with no interest or need for MEW. Does that suggest some substantial fraction of the other 69% will really be hurting when they (we) can't tap the equity machine any more?
I take comfort in my personal position at the bottom of the food chain. People have to eat and our biggest customer is Wally world.
OT-The market looks to be very manipulated and propped up right now, but that makes sense as the hedgies need to unload into the marketplace before the resistance levels are broken and technical selling trashes the markets.
The support levels should by all accounts have been broken by now, but that they haven't been indicates not true buying but most likely propping to prevent the fire selling into a technical rout.
Doubt it can be propped up too long, though. At some point the PWGFM aka PPT must run out of dry powder.
Look out below.
MLM, yes, we can get a decent estimate - and I try to put that up this afternoon.
Last quarter the percent equity was 33% (by my calculation) for homeowners with mortgages. But that was revised down in this report. I wouldn't be surprised it it's under 30% now.
Best Wishes.
I was at a seminar two years ago touting investing privatly in second mortgages. I wounder how all those excited people who were issuing privates second mortgages are doing today.
This graph shows homeowner percent equity since 1954.
Actually, that chart goes back to 1952.
iceman, homeowners without mortgages. Sorry I wasn't clear - this has nothing to do with renters. About 31% of household home their homes free and clear.
Best Wishes.
I'm trying to picture a scenario where the US economy DOESN'T contract by 5-10%, and I'm having a hard time. If consumers were spending 102-105% of net income due to MEW and there's no more MEW, the most they can spend is 100%. Increased energy costs cuts the budget for everything else, and a good fraction of that capital goes offshore. Then J6P misses a payment on one of his credit cards, and they all go up to 28%. More interest charges reducing his budget for everything else. And this is the guy supporting 70% of the economy?
Maybe the best bet would be for 5% to BK and cut their interest payments drastically, renting instead of 'owning', and spending the difference between mtg and rent at the mall. But of course BK laws were recently tightened to make this more difficult.
Where is spending going to come from to keep the economy from contracting at 5%?
Harm, thanks. I definitely rushed this post.
Back when I first started writing about this, no one in the media cared - so I took more time. Now the headlines are everywhere and I felt rushed!
Best Wishes.
I was at a seminar two years ago touting investing privatly in second mortgages. I wounder how all those excited people who were issuing privates second mortgages are doing today.
Probably back at their day jobs as Starbucks barristas. Whoops, maybe not...
km4 writes:
Homeowner Equity Is Lowest Since 1945
Congrat to Greenspan, the Bush admin, the crooks on Wall St. and to all the other scumbags that rob Peter to pay Paul and themselves.
may you all rot in hell !
You missed FDR
I uploaded Gasparino's daily Ambac pump:
YouTube - Charlie Gasparino attempts his daily Ambac pump
You can tell he knows he is trashing his reputation with these continuous "breaking news" BS segments. Guy looks and sounds like a prisoner of war being forced to read from a script. I almost feel sorry for him.
You missed FDR
Hey, now. I know historical revisionism re: FDR is all the vogue now in some circles, but that man got us through a Depression, World War and probably prevented an outright Communist revolt in the U.S. The CCC also probably saved my dad from starving, which in turn saved me. He wasn't perfect, but not the demon some portray him as, either.
HARM I ignored the idiotic comment on FDR
@Bill,
Hey, man, no problem. CR is like manna from heaven, so a minor typo here and there is totally forgiveable.
Ok, stupid question from a first time commenter and decided non-economist: "Household percent equity was at an all time low of 47.8%" 47.8% of what? Total equity? What does this number mean exactly (besides a sign of the apocoplypse like CNN would have you believe)?
"Household percent equity was at an all time low of 47.8%" 47.8% of what? Total equity?
Equity in their houses. Homeowners own 47.8% of all the occupied houses in America, Mortgage lenders hold 52.2%.
I don't know if all of the decline in equity can be blamed on mortgage equity withdrawal -- although much of it can. During the last 12 years, there was a 5% increase in home ownership, and much of that was due to subprime lending. Many of these new homeowners used 100% financing, so if you add 5% to the total home ownership statistics and few of these people had any equity, that would have some impact on homeowner equity (how much I don't know.) There was obviously a great deal of mortgage equity withdrawal, but I am not sure if we can say all of the decrease in equity resulted from it.
CR said: "...This is just the beginning. If house prices fall 20%, households will lose $4 trillion in equity. If they fall 30%, households will lose $6 trillion in equity."
If the doomsday tone of this post is really correct, didn't this all start in 1952?
According to the "Household Percent Equity" chart, equity fell by an "alarming" amount from 1952 to 1966. Then it went sideways until the early 1980's, and began to make all-new multi-decade lows in the early 1990's.
So what? If this was a meaningful statistic, why didn't the U.S. economy return to the stone-age decades ago? Why is a sub-50% equity level the magic number level that's going to take us down now?
For all the grief the Bush Administration gets for spreading fear to achieve its Machiavellian ends, CR certainly gets an undeserved pass for doing precisely the same thing here.
Sebastia
But, but, but...subprime lending to low-income people was going to let more people participate in the American Dream of Home Ownership!
I was in the room when our own state Attorney General said it was important NOT to put Household International out of business, because that would make it harder for people to get credit...
Now you're telling me that people own less, instead of more? Looks like somebody miscalculated.
iceman - the answer is a.
other Jim - you produce Corn Nuts?
By the way, the drop in net worth is touted as the first in 5 years. Well, depends on how you do the math. The nominal drop in net worth is 0.9%, but tack on inflation and population growth, and real per capita net worth fell by about twice that much in Q4, and was down about 0.2% from a year ago.
IMO, I don't think 48% number is apocolyptic. The number i'm looking forward to is the one CR will post later.
HaloScan.com - Comments
What happens to households with mortgage if price falls 20 or 30%?
ahh... the old USD/YEN carry trade:
USD-JPY 102.9300 -1.0830 -1.04
Bloomberg 30 seconds ago.
I'm feeling optimistic. Lenders thought they could safely chain homeowners to massive mortgages, but the rules of society evolve just like individual genes and the fittest meme that has emerged is "it's okay to cut your losses on a bad investment even when it's your house."
Lending rules are changing to take this new social more into account. Larger and larger down payments. Tighter restrictions on credit. Any whiff of speculation and the points soar. Lenders will lobby Congress to pass laws making it harder to foreclose, or allow going after previously protected owner-assets in response. And the end result? No more housing bubbles for a long, long time.
FDA says recalled heparin contained contaminant - USATODAY.com
Demand all trade with China be stopped. Call your representative NOW!!
We should do no trade with the criminal Chinese.
Protectionism is ABSOLUTELY CORRECT in this instance.
If they don't, vote them out of office.
America has been sold to criminals by our greed.
Claiming that a bunch of Saudis based in Afghanistan attacking and killing 3000 Americans means we have to kill several hundred thousand Iraqis on the one hand, and reporting on the actual disaster created by the fearmonger in Chief are not equivalent.
Is there a breakout of total # of households, #/% renters, #/% own-no mortgage, #/% own-mortgage, to understand the total potential damage and where the battle lines for the bailout will be drawn?
I suppose I'm in the minority, but I don't view the long-term decline in home equity as necessairily a bad thing.
In a broad sense, homeowners are becoming more financially savy and realizing it's not efficient to tie up equity in their primary residence when they can use leverage to improve their ROE, much as businesses have always done.
Now granted, the past five years have taken this approach too far, as many unsophisticated homeowners got in over their heads. But longer-term, for the 80%-90% of financially secure homeowners who don't play games or speculate, leveraging up is a reasonable financial stragegy IMO.
REBear, I agree and was just referrring to the big red "Breaking News" banner CNN has on its website with the 47.8% number.
In a recent speech in Washington, Charles I. Plosser, president of the Philadelphia Federal Reserve, suggested that the Fed's traditional role as an inflation fighter can be set aside in certain unique situations.
I believe we are in a situation where monetary policy cannot be made by focusing solely on inflation, he said.
But neither should the Central Bank be focusing solely on the threat of recession and the struggles of Wall Street.
On Tuesday Dallas Federal Reserve President Richard Fisher introduced some balance to the discussion when he said inflation is the greater threat than an economic slowdown. He plans to urge his colleagues not to cut rates further when they next meet March 18.
hmmm, with numbers like this the markets will be forced to end positive today. No way around it.
This chart is a reflection of the lax standards used by lending institutions over the last 10 years.
The equity will improve dramatically as the loans that are currently up-side-down get liquidated and new loans with a 20% down are booked.
Equity as a percent of debt will return to historic norms rather quickly.
I believe the chart is a reflection of future write offs coming from financial players.
So now banks own more houses than the citizens do.
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Yummy!!! I've been wanting to buy a house for some time, unfortunately the prices have been out of control as others here have noted.
Thanks to the bankers, my opportunity to buy post-depression seems possible so hopefully we'll see alot of banks and families go under so I can meet my price point!!! Alot of people may find my wishes disturbing, but only fishes and marks would pay 7-10X income for a property in any area. With that said, game on!!!
The U.S. economic and financial system is undergoing a very challenging period of adjustment, and we are likely to be living with a high degree of uncertainty for some period of time," he said.
"If turbulent financial conditions and the associated downside risks to growth persist, monetary policy may have to remain accommodative for some time."
UPDATE 2-NY Fed chief says low rates needed for some time
| Reuters
72.97....kiss the 73 dollar bottom good bye.
HUH???
He encouraged targeted support for housing to prevent further price declines and added that a fiscal stimulus package signed into law by Congress recently "will provide a meaningful level of support" that could add up to 1.5 percentage points to growth over the next few quarters.
HUH????
If house prices fall 20%, households will lose $4 trillion in equity. If they fall 30%, households will lose $6 trillion in equity.
Has there been any historical decline on equity like these before?
The bottom chart is interesting... When houseold value goes up, mortgage debt goes up. But when it goes down, debt stays flat or decreases slightly. We can already see the blue curve falling while the red one is flat.
Falling value can happen easily (it's happening right now!) but falling debt can only be caused by paying it off or defaulting. We know that mortgage debt will not be paid off quickly. The only way for that red curve to fall in the short term is for a massive number of foreclosures to happen.
I'm not sure that decline in home equity has to be a bad thing either. From a financial perspective your house is a large, illiquid, unhedgeable, dollar-denominated asset. Why take all that risk? Extracting equity in the form of a cheap loan makes some sense to me. Though this does increase your leverage. If a cheap hedge was available then MEW becomes a no-brainer. Too bad we don't have an options market for the Case-Schiller index.
In my mind, the problem isn't the fact that people extracted money from their homes. It's what they did with the money after they extracted it that's the problem. ( i.e. they blew it on hookers and blow instead of investing. )
Maybe Jas Jain is right.
Tanta - I guess I won't have to post links to MarketMinder's comments or mention the performance of Fisher Investment's Global Portfolio any more since they are advertizing your your website.
Saves me some time and you some annoyance ;~)
Now I hate to add crap here, but can Tanta/CR do some numbers with GDP please??
Re: The realtors today also released their latest economic outlook, which foresees 1.5 pct GDP growth in the US in 2008, and 2.4 pct GDP growth in 2009. The group sees a scant 0.1 pct rise in GDP for the first quarter of this year, followed by slowly improving growth of 0.9 pct in the second quarter, 2.0 pct in the third, and 2.3 pct in the fourth.
In terms of trillions, what are we talking here, isnt GDP around $13 trillion or so..I could be way off on that guess from the blue, but are we to assume from NAR and The Fed that they think we are going into a recession and then going to add a few trillion to growth and then, ignore the war debt, the housing debt the trillions lost on stock, bonds......anyone??
Thanks to the bankers, my opportunity to buy post-depression seems possible so hopefully we'll see alot of banks and families go under so I can meet my price point!!! Alot of people may find my wishes disturbing,
It's even better than you think. In the "post depression" period the last time around (1941-45) a lot of young men were living on military bases etc., which further reduces the demand for housing.
Geithner has caved. He used to command respect. Now he's just another cog in the scam.
F U, Geithner, you whore.
Americans now are poorer...so at what point do "c" notes start falling from the sky?
borkafatty,
That occurs at 2:00 pm daily when the TIO auction monies are disbursed!
energyecon.
Yep good ol' TIO Sam.
Cheers,
The Fed and all its staff need to be held accountable for every word thy utter and to be crucified. They need to be watched and analyzed and held accountable for what they have done and are doing to America!
The mainstream media has been a bunch of pussies for not being involved in the pursuit of truth and justice!
We should be thankful to have a blog like this which can help contribute to discussions and gather information in regard to what these crooks are doing.
Obviously a few words dont matter to them, but Americans have to take back America from these whores!
It is interesting to think that a 2% drop in housing prices is enough to wipe out a 3% growth in GDP. Maybe "recession" should be redefined...
The fat man and the skinny man stand on the scale together and declare themselves average.
The 31% of houses with 100% equity are substantially less expensive than those carrying mortgages. Their "losing" 20% is $30-40k. The people who listened to Realtors® like John Lockwood in Sacramento last year and bought the median home are already experiencing $104,000 in losses. My modest crib is down may 8-10% y-o-y and that means the same $100,000+ loss to the national figures. See the potential cascade failure problem? A 10% price decline puts far more than 10% more mortgages underwater. Even if the distribution were linear (best case) a 69% price decline represents the same amount of money as 100% of the mortgages outstanding. We don't have to worry about anything like that. When own v renting returns to parity it become academic as to who owns the "house" or the paper. That's the lower limit.
REBear asked, "What happens to households with mortgage if price falls 20 or 30%?"
I'm probably over simplifying, but if home values decrease by 30% on average, then - on average - equity is completely wiped out for mortgage holders (if the equity % comes in under 30% as CR suggests). What does this mean? No 2nd mortgages, no HELCOs, complete loss of wealth effect from housing....it also implies 50% mortgage holders being "under water"....just to name a few. Quite a dire scenario!!
In the "post depression" period the last time around (1941-45) a lot of young men were living on military bases etc., which further reduces the demand for housing.
John Stark | 03.06.08 - 1:49 pm
JS -
If you go back to guys like Studs Terkel ("The Good War"), you'll read that folks talked about many areas with an acute housing shortage. Rents were way up as there was no construction of new units and there was a massive influx of workers into areas for war production.
My grandmother was in a small western PA town and there were boarders all over as people came in to work at a nearby war plant.
YouTube
- The Clash - "Know Your Rights"
Know your rights!
"Has there been any historical decline on equity like these before?"
wawawa
Um, ancient Rome?
In all seriousness, I fail to see how a oil-dependent economy is going to get us close to these bubble pricing excesses ever again.
Welcome home, Malthus.
Sad to say I have a brother in law who bought at the top..who 3 years ago to the day told him to refi that IO-ARM and he never did...this September his ARM reset to the tune of $800 large...well here it is again 6 months later
( libor ) and another March reset is in his mail box...i truly feel for him...but he is a rebel type who takes advice form the local News Paper...so now I say nothing...but he does look a little grayer these days.
CR:
Have they no tapped any equity thru a HELOC either?
Are the 31% of households without mortgages are households that (a) fully own their homes and (b) households that rent.
iceman | 03.06.08 - 12:57 pm | #
the answer is (a). However those are generally smaller and less valuable homes than the ones with mortgages on them (mostly owned by little old ladies). By value about 25% of the housing stock is owned free and clear (i.e. they had a mortgage burning party sometime in the past). Since they are unlikely to start pulling money out of their homes, this means the housing ATM is totally smashed and will not be revived for a LONG time. Since that was running at 5-6% of disposable personal income for most of the last few years, that will be a big hit to consumption.
Quite a dire scenario!!
Extend that thought. What happens to the trade-up market when there's no equity to trade up?
Remember this?
Straight Talk on the Mortgage Mess from an Insider - Herb Greenberg - MarketWatch
Seb asks "So what? If this was a meaningful statistic, why didn't the U.S. economy return to the stone-age decades ago? Why is a sub-50% equity level the magic number level that's going to take us down now?"
I don't think it's the sub-50% equity level itself that is all important, it's the fact that the trend coupled with potentially significant declining home values implies that equity will be nearly wiped out for mortgage holders...that WAS NOT the to 1966.
isn't it about time for the afternoon rally ppt short cover squeeze bailout rumour thingee to get going?
America is The Next Russia.
We are in serious decay folks, it starts with Bush and trickled down to trailer parks. Call it Rome burning or the new Russia, it's over baby!
Look at the retards in Vegas, which are as moronic as The Fed economics!
Almost 40,000 patients who visited a Las Vegas clinic have been told to get tested for hepatitis B and C, as well as HIV, after health officials say they found that nurses there were reusing syringes and dosing out contaminated medicines.
So far, six new cases of hepatitis C have been traced back to the Endoscopy Center of Southern Nevada, officials announced last week in shutting down the clinic. Five of those patients visited the facility on the same day, Sept. 21.
....that was not the case from 1952-1966.
"Even if the distribution were linear (best case) a 69% price decline represents the same amount of money as 100% of the mortgages outstanding. We don't have to worry about anything like that. When own v renting returns to parity it become academic as to who owns the "house" or the paper. That's the lower limit."
I agree with you there. The only variable is what happens to rents. Do they also fall, and housing prices chase them down? Or do they rise and meet housing prices somewhere in the middle.
I think this will be a local variable. It is possible that rents in dense urban centers might rise, as renters cease "fleeing" to home ownership in the cheaper burbs.
But in urban cores that are overbuilt with condos, or bubble areas with limited economies and a glut of under-occupied recent development, rents could possibly fall. Link to a story from the Modesto Bee, where rents are flat and apartment vacancy rates are high:
Housing slump taking toll on rentals - Business - Modbee.com
Posted this link last week, but don't think many saw it.
in response to: "If house prices fall 20%, households will lose $4 trillion in equity. If they fall 30%, households will lose $6 trillion in equity."
wawawa asked: "Has there been any historical decline on equity like these before?"
In a different asset-class. Stock mutual funds (predominant owners of stocks) lost about $2 trillion in value between 2000 and 2002.
Between appreciation and new investment it was all recovered (and then some) just a few years later.
S.
The national debt (9 trillion, not counting the entitlements) is now about the same as the remaining household equity (~50% of value)? Coincidence?
If we liquidated all household real estate, we can pay off the national debt, after the paying the banks, and then everybody starts all over again!
Household Percent Equity chart is a little misleading.
I think someone pointed out already that if the homeownership increases rapidly, as it did in the last decade, you would expect this number to fall just because the new homeowners have very little equity in their homes, thus diluting the total. In other words, this decrease would happen even without the MEW's, etc.
There must be a way to normalize this data to take into account such effects.
Dirk van Dijk,
if 25% is paid off and 48.7% is owned by owners....
.25 + .75x = (1-.487)
x = (1-.487-.25)/.75 = 35%
Roughly, those who have mortgages own 35% of their home.
If there's a furthur price drop of 35% with no increase in paid principal, the average home owner with a mortgage will have a 100% LTV loan.
Not impossible.
bZb - it's true that a big increase in ownership raises the number of new owners with little equity. But the ownership rate has been falling for at least two years now (Census Bureau reports this quarterly). I don't think the effect should keep working as the ownership rate falls.
Cash-out refis definitely have something to do with recent declines in percent equity
Nemo, re Gasparino:
Thanks for the clip. How right you are...
I see nothing magic or significant about the 50 percent mark.
I think the significant fact still, after all the hoopla, is the deviation of prices from the norm. The under 50% number means that leverage increased slightly, but the drop in prices (when they revert) is what will crank that leverage.
I wonder what net leverage on gold or oil or wheat is today?
bZb,
Not sure it's that significant.
Homeownership rose along with home prices, therefore all but the very last to get in had "instant equity". Both trends have obviously reversed. Regardless, homeowner's equity has declined throughout the boom, and is accelerating through the bust.
Indy writes:
The national debt (9 trillion, not counting the entitlements) is now about the same as the remaining household equity (~50% of value)? Coincidence?
Indy, not quite correct, the $(T figure does include the debt held by the SS trust fund. Currently the SS trust fund is growing rapidly (apx $200 B a year). However in 2017, the growth stops and it starts to use the interest on the accumulated assets (aka the debt of the govt it owns) and somewhere around 2022 or so it starts to dip into principal. The principal is exausted in 2042 or so (based on the Intermediate case of the SS trustees report). For a really in depth look at this see Bruce Webb's site (dont have the URL handy but if you link to Angry Bear, from there you can then link to Bruce)
Sebastian,
Your reaching is falling shorter and shorter of your grasp. Equating earnings & stock prices of going concerns to underwater borrowers is beneath you. Or maybe you are not the real Sebastian?
There is a very interesting extensive quote at Robert Reich's Blog
by Marriner Eccles (Fed Chairman 34-48)that was posted on Sunday. History does not repeat, but it does rhyme, and this seems like Dr. Seuss to our current situation.
Bob_Dobbs,
There's a new condo complex in Woodland Hills/Warner Center, that is now an apartment complex. Up until Dec 07, had a For Sale: Mid 300K. Drove by today, now leasing luxury apts. Granite counters, fancy appliances, etc. Everything you would NOT put in an apt.
I suspect in 5 years they'll be formica counters, GE basic appliances and mid range Price Pfister fixtures.
I think the KB homes condo development still building, not 200 feet down the same street, advertising for sale in the high $300's will have the same fate.
They may get above average rents for a short while. But I think supply will start to swap demand.
Cheers,
bZb said: "...There must be a way to normalize this data to take into account such effects."
There is, but the charts wouldn't be as "convincing.":)
Seriously, though, this is a weakness common to most of CR's charts, and sad to say, it's not because the normalizing data isn't available. My own pet-peeve is that so many of the housing charts (permits, sales, etc.) aren't adjusted for population.
S.
Duceswild,
Thanks! For starters, i think we will either end up with a bunch of angry boomers or gen y. If homeowners are bailed out generation y will suffer. If the housing market is allowed to correct, boomers will be screwed.
Dirk, great find. That is the biggest ruh-roh of the month...
Time for a devaney update... 'positviely puking' ?
other tidbits
Yahoo! Finance Essentials
Community SentimentPopular Stories Stocks everyone is talking about. (What's this?).
Bullish
Thornburg Mortgage Inc. (TMA)
rofl---WTF
American Oriental Bioengineering Inc. (AOB)
DXP Enterprises Inc. (DXPE)
Homeowner Equity Is Lowest Since 1945-
but were rich !
Back when I first started writing about this, no one in the media cared - so I took more time. Now the headlines are everywhere and I felt rushed!
CR,
Take your time. There are plenty of people who can rush to publish headlines. There are precious few who can analyze what's going going on well.
Clyde said: "Your reaching is falling shorter and shorter of your grasp. Equating earnings & stock prices of going concerns to underwater borrowers is beneath you. Or maybe you are not the real Sebastian?"
Please re-read my post and what I was responding to. My point was that Americans endured and recovered from another major loss in a different asset-class, stocks, but those losses were recovered far faster than anyone believed they would be.
There's a similarity of bearish sentiment in the housing "debate" here, i.e., no recovery is possible in any time-frame or at the very best it is years and years away. The despair of a major low. JMO.
S.
The support levels should by all accounts have been broken by now, but that they haven't been indicates not true buying but most likely propping to prevent the fire selling into a technical rout.
Doubt it can be propped up too long, though. At some point the PWGFM aka PPT must run out of dry powder.
Look out below.
Anonymous
at every price point along the market's graph, most big trust, pensions, and funds must be +90% in equities..
think about that technical feature for a few minutes.
I have to ask, do they count those with negative equity as having zero, or do they actually subtract that amout from the total?
Wait.... Didn't NAR tell me the best way to build wealth is to own my own house and real estate?
Bob Dobbs - the thing is, if oil is really driven by demand and not a rush to a 'safe commodity', then as gas prices keep rising, we'll see an increase in housing density. I think that's only slightly longer-term. That means prices further out will take longer and longer to recover.
Sebastian, there is a big difference between the losses from assets in the stock market, and the losses on assets from the housing crisis. That difference is who has lost the equity. With the stock market, most of the wealth was held either by the well off, with a lower propensity to consume, or in 401ks, which are mostly not available for consumption.
The distribution of losses this time is very different.
Keep It Simple, I'm Stupid said: "...The distribution of losses this time is very different."
Yes, they're highly concentrated in California, but nobody listens.
S.
There's one other difference worth mentioning Sebastian. In 2000 you got a margin call on your pets.com stock. In 2008 you get a margin call on the place your family is living in.
crispy&cole writes:
Maybe Jas Jain is right.
People are losing the maybe in droves.
Yes, they're highly concentrated in California, but nobody listens.
So what you're saying is it's contained?
Pheew. That's a relief.
most big trust, pensions, and funds must be +90% in equities..
think about that technical feature for a few minutes.
I am counting on it!
Muhahahahaha!
Visible signs? Out shopping today in Tucson. Nobody in Ace Hardware, nobody in Office Depot, and nobody in the supermarket to speak of. Parking lots about 2/3 empty. Will see how things are over the next week, but I think recession has gotten to S. Arizona.
If you go back to guys like Studs Terkel ("The Good War"), you'll read that folks talked about many areas with an acute housing shortage. Rents were way up as there was no construction of new units and there was a massive influx of workers into areas for war production.
My grandmother was in a small western PA town and there were boarders all over as people came in to work at a nearby war plant.
homedad43
No, I'm sure you're right, Dad. My point in my earlier post was that people shouldn't be too cheery about the prospect of a Depression. Even if you are positioned to take advantage of the financial opportunities that depression presents, we should be aware of the potential for destabilization that leads to war--as it did before.
During the war a lot of smart guys probably made money hoarding commodities, then died when somebody dropped a bomb on their heads.
Well, if lenders now own 52 percent and growing, then I guess they're really happy about that, eh? I'm sure they look forward to even greater ownership wealth coming their way.
Hey, I was at Home Depot in Tucson too and I saw one other customer - was that you, Chris? Also, I've never seen so many commercial properties available for lease. This will be one doozie of a recessio
There's a similarity of bearish sentiment in the housing "debate" here, i.e., no recovery is possible in any time-frame or at the very best it is years and years away
Sebastian, please.
I'm the biggest bear I know and I'm only another 10% drop from pulling the trigger on the house I'm looking at.
It (nominally) peaked at $628K in 2005. It's on the market for $500K now. If the listers drop that price to $450K, then I'm all over it since that is the price level I can afford, even though it's possible the property can return to its ~$380K groundstate, I'm not strong enough a deflationist not to worry about wage-price spirals start kicking up.
But the 2003-2006 appreciation was largely bullshit due to the insane lending practices that were allowed. I saw this same movie in Japan 1992-2000.
~$380K groundstate
¿Que?