Q1 2008 Mortgage Equity Withdrawal: $51.2 Billion
Submitted by
CalculatedRisk on Thu, 06/12/2008 - 12:00pm (72 comments)
in
User login
Who's online
There are currently 42 members and 90 guests online.
Currently online
- Duke of Con Dao
- josap
- Elvis
- HomeGnome
- poic
- Broke Not Broken
- sdtfs
- greenchutes
- Leigh
- fried
- Comrade Elmer Fudd
- pastor doug
- YAA
- hiteshb
- Rajesh
- aleister perdurabo
- skip
- Basel Too
- Juvenal Delinquent
- aClem
- Mike in Long Island
- EEngineer
- mhdoc
- Bad Dawg Bobby
- mos maiorum
- bearly
- Napolean
- ille_vir
- Unhappy American
- SF Tanzanite
- Live Free of Debt
- american taxpayer
- Outsider
- comrade mike
- Rob Dawg
- Bob_in_MA
- Jonathan
- Sippn
- digalert
- hiker90
- MSM
- searchforthetruth
Wow. Ok, so the mess is quite the motherlode.
Uh oh.
No worries. The stimulus rebate checks will compensate for lack of MEW.
Who said we can't eat houses?
me first:-)
guess Not:(
And the lag time for MEW/spending is probably 2-3 months, right CR?
Another headwind for the good ship Sebastian.
MEW is also a kissin' cousin of the home price appreciation wealth effect. With less MEW it becomes harder to justify certain categories of other consumer spending.
Bob_in_MA, maybe even a little longer. MEW appears to be spent over several quarters. But this will be a drag on consumption this year.
It's hard to distinguish the MEW drag from the rest of the economic slowdown, but I think the effect is real - if not perfectly measurable.
Best Wishes.
So the tax rebates are less than the MEW decline? What is the explanation for retail sales rising for two months in a row?
So my estimate - doing the same calculation as above - is that MEW will be a drag of about $135 billion on PCE in 2008, or reduce PCE about 1%, all else being equal
So the decline in MEW will be greater than the election-year-free-money being handed out by the government.
Cool.
Maybe HELOC lenders can introduce 'overdraft' fees?
Ok, CR, now we know where the good numbers came from. And was somesone saying that the 'american public is changing its habits' ???
Republican presidential candidate John McCain said on Thursday it was important to "talk up" the U.S. dollar and short-term steps were needed to strengthen its value.
http://www.reuters.com/article/bondsNews/idUSN1237164520080612
This country is so screwed it's pitiful.
This was all tax free cash injected into the hands of a good portion of the population.
I have friends that without MEW wouldn't have had any money to spend over the last several years.
It is impossible to overestimate the effect that MEW has had on the economy over the last 5 years.
I expect that if one were to combine the decline in MEW with the increase in the percentage of personal income devoted to servicing debt, the outlook for PCE would look even more grim.
Repost from below...
Gonna be a real interesting day tomorrow with June options expiring. LEH trading is going to be off the hook with all of those 17.50 Puts trying to get paid off. I'll bet there are some serious elephants dancing in the room.
Do you put your money on the Puts winning, or are those a lot of average Joe's competing against the IBs, hedgies, and institutional investors. I suspect the deeper pockets are on the plus side, but I could be wrong.
CR, just have to say that the information you present each day is probably in the top 3 I see, and I see a lot. If you ever want to be an FX analyst, you could be very rich. Thanks.
I think they truly believe that "talking up" the dollar will make a difference.
Average Joe wrote:
It is impossible to overestimate the effect that MEW has had on the economy over the last 5 years.
I 100% agree. Without MEW's, Massaratti would never have made a comeback. I'm serious!
The number of homes where I want to buy that have an extra $250k to $500k of mortage on them is amazing.
Now what are they going to do as their barely over $100k salaries drop down to $80k? Yep.
But this will take years. We're see "the upper middle class" max out their credit cards. When do you think they'll have a credit tightening? We here know more "waves" are ahead.
Got Popcorn?
Neil
That chart makes my stomach turn. We are so toast.
awgee writes:
I think they truly believe that "talking up" the dollar will make a difference.
Hey, it will. As long as "talking up" is increasing interest rates.
Got Popcorn?
Neil
opex next friday...
It is impossible to overestimate the effect that MEW has had on the economy over the last 5 years.
It's everywhere. Another industry that has been propped up by MEW and easy credit is higher education. That bubble has to pop eventually. In 1995, when I went to Duke, it was 18K/year. Now, it's close to 48K. Question is how much and how long the Feds are going to prop this up by making Uncle Ben increase liquidity to this market.
It is impossible to overestimate the effect that MEW has had on the economy over the last 5 years.
Easy. Pull up a 20 year chart on Harley-Davidson (HOG). Wanna know where the investment half of Greenspan's estimate went? There ya go.
Another industry that has been propped up by MEW and easy credit is higher education.
So true. Now I'm very scared too...
Got Popcorn?
Neil
Rob Dawg, you are so right. But also how much child support, and alimony payments went to HD instead of the legal receipents? just thinking
Another industry that has been propped up by MEW and easy credit is higher education.
There is no fiat currency that is as easy to inflate as a college degree.
Gonna be a real interesting day tomorrow with June options expiring.
Off by one ... week.
CR,
How does the increase in retail sales compare to the rather strong increase in consumer credit seen last month?
Good work CR, appreciate the fine material who've been dishing us. Keep it up!
I would be curious to see some sort of data that directly relates MEW with automobile purchases. I would assume that most MEWs used to purchase cars went toward economy cars and hybrids. No? SUVs and trucks? Imagine, "owning" a SUV bought on a MEW -- double-trouble upside down!
Interesting times.
What fraction of MEW is being used by borrowers to refinance a fraction of their first-lien debt?
I used my HELOC, which is (prime-1), to pay off some of my first lien, which is fixed for five years (6%). I'm betting/hoping that the FF rate won't increase by more than 2pts--the spread between my HELOC rate and my first-lien rate--before I pay off the HELOC.
You have to figure that as the number goes down the percentage devoted to consumption goes up. It would be a mistake to assume that the percentage is independent of the amount.
Sorry, false alarm then. Thanks guys!!
Interesting.
Central bank body warns of Great Depression
Central bank body warns of Great Depression
CR, just have to say that the information you present each day is probably in the top 3 I see, and I see a lot. If you ever want to be an FX analyst, you could be very rich. Thanks.
Don't listen to him! You'll be POOR, dirt poor I tell you!
But also how much child support, and alimony payments went to HD instead of the legal receipents? just thinking
Did a biker do your OL?
MiTurn, I wish we had some surveys of what homeowners did with MEW. I expect large SUVs would be pretty high on the list (maybe probably right after home improvement).
Curious, these numbers are net - so if someone paid down an expensive first that borrowing wouldn't be counted.
But you raise an interesting point: I wonder how much of this MEW was used to pay the other liens. I suspect a number of people have been paying their first and second by tapping their HELOCs.
Best to all.
Is the Banking Times website legit? I did a search for "depression" in the BIS report and got 0 results. So I wrote a comment about it, but it disappeared (deleted?).
Mike writes:
"Is the Banking Times website legit?"
Search 'depression' top right and it pops up on top.
IMO most of the investment bit is not yielding much. Some borrowed to pay the 1st and 2nd mortgages... this would be a good investment if prices were rising...
Then, some invested in their homes, new kitchens, baths, windows, etc.etc. Get a better, more impressive life style, and meanwhile making a great return on investment - while prices are rising...
Stocks already allow margin, but no doubt some borrowed to buy stocks. Great investment while prices are rising...
Some hard working sods started a little business. Tough row to hoe, but can be a good investment when the economy is expanding...
IMO the hit to the economy is the entire reduction in MEW. It's all really just more borrowing that pumped up the economy in various ways. It's gone now, but the debt remains... well, until somebody writes it off.
Calculated Risk writes:
MiTurn, I wish we had some surveys of what homeowners did with MEW. I expect large SUVs would be pretty high on the list (maybe probably right after home improvement).
In the spirit of the plural of anecdote is data here's what we did with our HELOC:
We kept CLTV below 30%. Isn't this pretty much what everybody did?
The new grads used MEW to pay off their student loans. Now that they go underwater we, the taxpayer, will be paying off their student loans
(tuition, bar bills, food, Spring Break, and DUIs). I'm glad they could party on us.
Isn't this pretty much what everybody did?
Pretty much. Maybe throw in a boob job or two.
One has to assume that all the MEW in Q1 was from very old loans, probably pre-2003, given the drop in home prices and tighter standards requiring some reasonable LTV after the draw. One would think that it would be still 80% LTV. In that case, one could say that most of the loans may have been pre-2002.
Most likely it probably retirees drawing down. Any stats on reverse mortgages ?
This is just another sign of lack of saving by the boomers. They are going to suck out all the money in their homes before they are gone and leave nothing for their kids, including no SS or Medicare.
Having rate super low does not help. There is no incentive to save and those w/ savings are getting nothing. So retires and soon to retire are getting screwed so that Uncle Ben can save the banks.
I don't know why the government doesn't charge them a finance fee of 10% of the equity of the company each time one of the banks taps the window. They should nickel and dime them until they file bankruptcy much like the banks do their own subprime.
So, my takeaway from all this is that Home Depot's stock has definitely bottomed, right? Ditto Lowe's, Harley-Davidson, Winnebago, Brunswick, et al... Wow, everything looks so rosy now...
The government checks have masked this effect for the nonce. When they disappear, there will be a bigger drop...unless the government spews out more money.
Chris writes:
The government checks have masked this effect for the nonce. When they disappear, there will be a bigger drop...unless the government spews out more money.
Chris | 06.12.08 - 5:41 pm | #
RE: Gov't stimulus checks & 'timing'...
There might not be anymore stimulus THIS election cycle. It would come too late to do any good.
I remember hearing a poli wonk (worked for one of the major campaigns earlier in the decade - can't remember which one, doesn't matter anyway)... he said polling suggests most voters pretty much decide if the economy is 'good' or 'bad' something like 4-6 months prior to the election - so that means if the election is early in Nov (month 11) then the electorate had pretty much decided that sometime in May (month 5) through July (month 7). Economic events after that don't seem to have as much effect.
He said it is possible to shake these opinions via media but costly (have to really hammer the air waves to shake the already established view).
They can change other factors & beliefs about issues & candidates much more easily (stuff like trust worthiness & perceptions of competency) right up to the last minute... but views about the health of the economy build slowly and form earlier than most others. That was this guys thesis...
In which case - spreading funny money now to offset falling MEW wasn't so stupid on the part of all these incumbents... from a 'I want to be re-elected' POV... Dem & GOP alike.
I wish I could find links on this - I heard the guy while driving (being interviewed). If it is true it explains a whole lot - in a cynical sort of way.
In my effort to keep up with the joneses I must know what "xeriscaping" is?
Have HELOC, willing to xeriscape.
"This is just another sign of lack of saving by the boomers. They are going to suck out all the money in their homes before they are gone and leave nothing for their kids, including no SS or Medicare.
I didn't know you could leave SS and Medicare to your kids.
The old cycle of run up the credit cards then take cash out to clean up the debt mess with low interest tax deductable long term mortgage debt has now turned into just running up the credit cards.
My wife and I sat down with paper, pens, and a calculator to figure out what our income would look like if gas went to $5.00 and $6.00 a gallon.
We also increased our food costs by %15 and %30 per month based on the above. We could continue to live the same lifestyle at $5 gas but $6 makes a difference.
It was also obvious if you were living from paycheck to paycheck you were not going to be happy. MEW papered over this kind of shortage the past few years.
What does MEW do for EWE
animal groomers
manicures
auto sales, aftermarket, service
quiki marts
little korean lunch places
middle class dinner places
vacations and the towns that live for tourists
consumer electronics
dentists
home furnishing, furniture makers
transportation, the truckers who move this stuff
small businesses partially funded by equity and mew
brokers of all kinds
retail
1/2 the stores in the avg. strip mall
music - tours, classical
arts -
jewelry industry
watches - rolex etc
landscaping businesses
catering
printing
construction
home stores like lowes
paint sales
wood - lumber
boats, marinas
gourmet foods and the food porn industry
ports
these are just a MEW of my favorite things
LawFitz writes:
The old cycle of run up the credit cards then take cash out to clean up the debt mess with low interest tax deductable long term mortgage debt has now turned into just running up the credit cards.
LawFitz | 06.12.08 - 6:28 pm | #
...then walking away?
Whooocoodanode?
BB wrote
Central bank body warns of Great Depression
I read all 93 pages of the June 08 BIS quarterly report and see nothing like what the "Banking Times" link above purports them to say.
Xeriscaping is the practice of landscaping utilizing native plants and water conservation. This is becoming more prevalent in our thirsty western regions. Essentially it's doing with less and not too dissimilar a response to what we as a nation are now confronting. Instead of that bluegrass lawn with bocci and putting green you'll have to settle for cacti and snakes.
"Xeriscaping is the practice of landscaping utilizing native plants and water conservation. This is becoming more prevalent in our thirsty western regions. Essentially it's doing with less and not too dissimilar a response to what we as a nation are now confronting. Instead of that bluegrass lawn with bocci and putting green you'll have to settle for cacti and snakes."
Well, you don't have to have the snakes. Actually, one of the things we did with our MEW was replace the grass in our yard with hardscape.
Depends on whether you're way out in snake country. Actually for the past several years I believe the entire country has been full of snakes. They're trying to hide now.
Based on the trend, MEW will be zero by fall.
What is NEG MEW? Is that when you bring money to the table to refi? I already know some people who have done that to ditch their Opt ARMs and go fixed.
BMW Buyers in U.S. See a Ford in Their Future: Chart of the Day - Bloomberg.com
This might give you a clue about where the MEW went.
"Instead of that bluegrass lawn with bocci and putting green you'll have to settle for cacti and snakes."
xeriscopic | 06.12.08 - 8:08 pm | #
I figure here in Fl when I get back in a place we can do the "Golf look".
Oh no,not green grass. Sandtrap look. Yep,rototiller and Roundup couple of times a year...
Chris
Xereiscopic, Heard on the radio recently that lately snakes in southern California are more venomous than they used to be.
I'm just not sure if they meant rattlers or politicians.
I have to balance my natural unease with how things are looking with the fact that my puts on AVB, BBBY, CAKE, PII, WGO, and WSM seem to be responding very nicely to the decline of the home ATM.
Kind of the end of the thread but on the way home I thought of this.
When the MEW runs out xeroscaping may be the only option for the front and backyard. Get it, XERO.
That's it, nothing left. Nada. A difficult concept for many to understand but there is a hardway and that's what's left.
I figure here in Fl when I get back in a place we can do the "Golf look".
Oh no,not green grass. Sandtrap look. Yep,rototiller and Roundup couple of times a year...
Chris
Cobradriver | 06.12.08 - 8:47 pm |
As far as 'Florida au naturale' I personally like the 'smoldering palmetto' look better myself.
Good riddance to MEW. It was just a technique to imporish America.
This is really a positive development.
Yup just Xero it out.
After reading the original paper a couple of observations / questions:
Gross equity extraction has 3 components - Change in home equity debt less unscheduled repays, originations to finance purchase of existing homes less sellers debt cancellation, cashouts from refinancing.
Seems to me that only the last one and perhaps a portion of the first are what you are referring to as MEW, If you remove the middle term the curve is nearly as parabolic. That middle term "originations to finance purchase of existing homes less sellers debt cancellation" sounds like the move up buyer to me, these folks have changed houses and increased their debt load not "extracted equity"!
Finally, the question. If one has an Option ARM making negative amortization payments is the amount of negative am counted as MEW?
Love this charting of the GWB economy.
Could some knowledgeable person explain to this ignorant person how MEW goes into investment and savings, aside from home improvement loans? (Are people really borrowing on their house equity to invest money?)
RSA: the answer to your question, for the most part, is "no". People do not borrow against their homes to buy stocks. That said, a substantial portion of MEW results from home sales and a good chunk of that money is invested. This happens when people sell and either move into a rental unit or downsize.
Thanks, Charlie Poole. That makes sense.
Personally, I like snakes (the kind that slither, not politicos). Plenty of cute little back snakes in the back yard.
The smoldering palmettos already have a foot of green on the end, and a year from now you won't be able to see there was a fire there, except for the dead pine trees.