The decline in equity as a % of home values is even more alarming when you consider how high home price appreciation has been for the past few years. Ceteris paribus, a high rate of home price appreciation should increase equity in % terms.
If current household equity levels are at 54.1%, and 34% of homeowners have 100% equity in their homes, then 66% of homeowners have an average of 30% equity in their homes.
If you believe, as I do, that nationally, on average, homes are currently as much as 20% over valued, then 66% of borrowers would have an average of 10% equity in their homes. Obviosuly, many of those would have zero or negative equity.
PW, there is some evidence (although no specific stats) from the Senate hearing that the average value of the paid off homes is lower than the average value of home with debt - so the percentages aren't perfect. But I do think it is scary!
RBG4life, Exactly. I'd expect percent equity to be increasing, not at a record low.
This is similar to debt service as a percent of disposable personal income - with historically low interest rates, who'd expect debt service (as a % of DPI) to be at record levels? Not me. But it is.
K-Dawg, there has definitely been a change in attitude. Some people would say it's crazy to have much equity in your house - it's not working for you. Other people like to sleep at night
according to the 2005 American Housing Survey American Housing Survey - National Data Table 3-15
owner occupied units with mortgages
EQUITY
100%-80% 15%
60%-80% 18%
40%-60% 23%
20%-40% 24%
10%-20% 9%
0%-10% 6%
none or negative 6%
If each house fell by 20%, then there would about 21% underwater (21% of owners with mortgages -14% of all owners). If people are more highly leveraged in places that will fall the most (as I would guess) it would be bigger than 21%. Of course this is owner-occupied. How many flippers will be underwater on their failed investments?
Excellent post CR and I think K-Dawg draws attention to an often over-looked aspect: the boomer demographics. The inequalities in income and wealth distributions are represented in those 1/3 fully paid (heavily boomers?) and 2/3 (heavily generation X?) not even close.
I wonder how the multiple owners (recall some 40% of last year's new sales were going to these folks) are situated demographically and expect the boomers are again not in a worrisome equity position. K-Dawg makes me think that the number of fully paid houses are owned by a smaller number of people and so that 2/3 who have little equity in their house is actually a relatively larger number of people at risk.
Another illustration of wealth disparity that is masked by the stats that don't often distinguish multiple home owners.
The second graph, "Impact of MEW on GDP" illustrates exactly how anemic the supposed recovery (since 2000) has been, supporting the contention that the growth has been focused on the select few.
A study of Home Ownership between 1985 and 1997 sheds even scarier light on exactly what is happening.
Home Ownership
\tYear
Age 1985 1997
\t
under 35 41.2 % 38.7%
35-44 \t 70.0% 66.1%
45-54\t 77.4% 75.8%
55-64\t 80.0% 80.1%
65-over 74.4%\t 79.1%
Overall\t 65.0% 65.7%
Note that home ownership under 35 and 35-44 actually declined. In the case of under 35, a 4% decline; the same is nearly true of the 35-44 year old crowd. In addition, unlike 1935-1960, which saw the most dramatic increase in homeownership, after the 1980 both members of the household had to work to make ends meet. And, ironically, it is the married couples that experienced an actual increase in ownership across all age groups.
When married couples are measured alone, there is a slight increase across all age groups.
The problem with the bull/sanguine argument--that everything will work itself out, the warnings about consumers being over-extended have always been proven wrong, etc.--is that it presupposes that there is no limit to the amount of debt the American consumer can absorb.
No one makes the argument that consumers will be able to absorb x% more debt, but they forecast a scenario that requires the consumer to do just that.
I'm not sure that there is a net lag between the extraction and consumption of home equity. After all alot of MEW is used to pay off credit card debt, in which case consumption preceeds the extraction of equity.
I've been having a discussion with friends about linkages from one real estate market to another, if any.
I have some good friends in India who have been making 80% a year for last 5 years speculating in real estate. Last year we discussed looking together at properties in Vilnius in Eastern Europe, which looked set to appreciate rapidly; but my Indian friends' deals were fast and furious in Chennai and around there, and we dropped idea. Action in one market affected action in another.
Here's a general question about potential financial links between property bubbles:
Are European mortgages bundled and sold off as mortgage backed securities, as they are in the US? A related question is: If so, are the buyers of MBS the same for US mortgages and European mortgages? Final related question: If so, would defaults and devaluation of MBS that originate in the US hurt or drag down real estate markets in Europe?
If hard earned surpluses in Emerging Markets are recycled into rich country housing, are they also buying the risk of the bubbly housing markets with MBS? Or are surpluses only financing US debt and European debt of other kinds?
CR - excellent post. Been looking for the update and explaining the approach is helpful. And superb and enhancing comments by all. Perhaps you could put up a post walking us thru the methods in a little more detail at some point ?
On a related topic there's the question of how much direct spending on housing has contributed (which you've covered and cover). But did you see the recent Business Week story on the role of healthcare in job creation. Which has been greatly lagging in this recovery. It's hard to follow there analysis but as a quick spot check, w/o taking about the detailed employment reports, it looks as if there were roughly 3 million jobs created from Jun01 to Jun06 and 1.7 million of them were in healthcare. While obviously over 50% it seems like some other sectors were making smaller contributions though not a lot.
Worth keeping mind as we try to guesstimate the Goldilocks (just right) vs Cinderella (everything MUST be right) economies.
Would it be possible to go one step further and calculate the GDP without MEW and without the growth the residential real estate industry has experience in the past 5 years?
This was perhaps the most enlightening post and statistics about the situation I've read this far. I would like to say it was an excellent, yet very scary post.
Did I understand it correctly that in the recent years, the average homeowner has drawn even more equity out of his house than the tremendous appreciations during that time? I really hope I understood it wrong somehow.
This was perhaps the most enlightening post and statistics about the situation I've read this far. I would like to say it was an excellent, yet very scary post.
Did I understand it correctly that in the recent years, the average homeowner has drawn even more equity out of his house than the tremendous appreciations during that time? I really hope I understood it wrong somehow.
ac, I'm going to write more about this and estimate the impact of the decline in RI on GDP.
I've also added a note - this analysis assumed consumption was domestic as opposed to flowing to imports - and, in reality, MEW has probably boosted imports signficantly. So MEW wouldn't impact GDP as much as the graph shows. I'll write more about this soon.
aapo, it's not quite that bad - homeowners didn't borrow more than their homes had appreciated. As an example, last quarter in the aggregate, homeowners borrowed 62% of the amount their homes appreciated.
That leaves homeowners with only 38% of the appreciation as equity. At the start of the quarter, homeowners equity was 54.4% - since 38% is less than 54.4% - their equity percentage falls.
It really gets ugly when houses stop appreciating - or values start falling.
Yes, of course, for constant MEW/appreciation ratio, both of them have to increase the same percentage. Well, I thought I was being silly somehow. Silly me.
But, as you said CR, the situation is still ugly; but fortunately not that ugly as I first thought.
It really gets ugly when houses stop appreciating - or values start falling.
/////////////////////////
especially at the same time property
taxes are zooming up....in NJ people looked at their property tax as one would look at an option premium...ie
the cost of the priviledge to owning a big asset in a rising mkt....uh oh
wait till the asset doesn't appreciate and the option premium still goes up in price yearly!!!!
During the event, Mr. Greenspan was asked about whether he thought growth or inflation was the greatest risk facing the economy, a question apparently meant to elicit his view on what the Fed should do next. He declined to answer, the people who attended said. As he often has in the past, he noted Paul Volcker refused to discuss monetary policy after Mr. Greenspan succeeded him as chairman, and Mr. Greenspan intended to do the same for his successor, Ben Bernanke.
Mr. Greenspan did say that much of the run-up in housing prices has apparently been due to speculators and investors, not homeowners, and that low interest rates world-wide have played an important role in underpinning housing, the people in attendance said. He also said it is not yet possible to say whether "mortgage equity withdrawal" is yet affecting consumption, and that it may never be possible to know for sure. Mortgage-equity withdrawal, a concept he has popularized in the U.S., refers to the ability of homeowners to increase their purchasing power by taking out larger mortgages.
Downloading the Excel file of Monthly Treasury Statements for Oct-80 thru Jun-06, then updating it with the July and Audgust data here and crunching away on it, one can see that total US Treasury receipts for the last 12 months were up 12.66% over the year earlier, which in turn were up 13.14% year-over-year. Considering how stagnant (or falling) have been the incomes of everyone I know, this is quite astounding. Yet it was exactly in this period that the real estate market became first dependent on hyper-loose lending for its last gasp, and then anemic despite continued loose lending.
Then, in August, receipts suddenly fell 1.2% from the previous August.
Is this a harbinger of the economy hitting the wall?
From whence came the income gains that were driving up tax receipts over the previous 24 months? How much came from booming home construction?
If real estate prices were starting to sink even as Treasury tax receipts hit new highs, what's going to happen if the August tax receipt drop indeed heralds a crunch?
I wonder if there might have been some shift in that aproximation of MEW over time. You are using if I understand it 30% of the difference between the growth in mortgage debt outstanding and residential investment. However, recently more and more mortgages are higher LTV's at origination than they used to be. how might this affect the calculations of MEW and the entire analysis?
I keep hearing that boomers are pulling equity out of their homes to finance their retirements that they never planned for so I wonder if the propping up effect will continue for some time...
I am not very convinced that your calculation is correct.
It seems to me that you added 50% of
MEW/GDP to the GDP growth rate, but,
to be consistent with your assumption
that 50% of MEW goes to consumption,
you have to actually subtract 50% of
your estimated MEW from nominal GDP, and then deflate, then calculate growth rate. By doing so, I got very different numbers.
The possible drop in homeowner equity over the the past 2 decades could also be the result of a generation transition.
Pre-WWII generation vs. Post-WWII generation.
Depression era vs. Baby Boomers & Generation X.
So much for mortgage burning parties.....
The decline in equity as a % of home values is even more alarming when you consider how high home price appreciation has been for the past few years. Ceteris paribus, a high rate of home price appreciation should increase equity in % terms.
CR-
If current household equity levels are at 54.1%, and 34% of homeowners have 100% equity in their homes, then 66% of homeowners have an average of 30% equity in their homes.
If you believe, as I do, that nationally, on average, homes are currently as much as 20% over valued, then 66% of borrowers would have an average of 10% equity in their homes. Obviosuly, many of those would have zero or negative equity.
Scary.
PW, there is some evidence (although no specific stats) from the Senate hearing that the average value of the paid off homes is lower than the average value of home with debt - so the percentages aren't perfect. But I do think it is scary!
RBG4life, Exactly. I'd expect percent equity to be increasing, not at a record low.
This is similar to debt service as a percent of disposable personal income - with historically low interest rates, who'd expect debt service (as a % of DPI) to be at record levels? Not me. But it is.
K-Dawg, there has definitely been a change in attitude. Some people would say it's crazy to have much equity in your house - it's not working for you. Other people like to sleep at night
Best to all.
according to the 2005 American Housing Survey
American Housing Survey - National Data Table 3-15
owner occupied units with mortgages
EQUITY
100%-80% 15%
60%-80% 18%
40%-60% 23%
20%-40% 24%
10%-20% 9%
0%-10% 6%
none or negative 6%
If each house fell by 20%, then there would about 21% underwater (21% of owners with mortgages -14% of all owners). If people are more highly leveraged in places that will fall the most (as I would guess) it would be bigger than 21%. Of course this is owner-occupied. How many flippers will be underwater on their failed investments?
Excellent post CR and I think K-Dawg draws attention to an often over-looked aspect: the boomer demographics. The inequalities in income and wealth distributions are represented in those 1/3 fully paid (heavily boomers?) and 2/3 (heavily generation X?) not even close.
I wonder how the multiple owners (recall some 40% of last year's new sales were going to these folks) are situated demographically and expect the boomers are again not in a worrisome equity position. K-Dawg makes me think that the number of fully paid houses are owned by a smaller number of people and so that 2/3 who have little equity in their house is actually a relatively larger number of people at risk.
Another illustration of wealth disparity that is masked by the stats that don't often distinguish multiple home owners.
This will be one great recession...
Very scary stuff.
The second graph, "Impact of MEW on GDP" illustrates exactly how anemic the supposed recovery (since 2000) has been, supporting the contention that the growth has been focused on the select few.
A study of Home Ownership between 1985 and 1997 sheds even scarier light on exactly what is happening.
Home Ownership
\tYear
Age 1985 1997
\t
under 35 41.2 % 38.7%
35-44 \t 70.0% 66.1%
45-54\t 77.4% 75.8%
55-64\t 80.0% 80.1%
65-over 74.4%\t 79.1%
Overall\t 65.0% 65.7%
Note that home ownership under 35 and 35-44 actually declined. In the case of under 35, a 4% decline; the same is nearly true of the 35-44 year old crowd. In addition, unlike 1935-1960, which saw the most dramatic increase in homeownership, after the 1980 both members of the household had to work to make ends meet. And, ironically, it is the married couples that experienced an actual increase in ownership across all age groups.
When married couples are measured alone, there is a slight increase across all age groups.
Joint Center for Housing Studies - Publications homeownership/mas_mcardle_Belsky_W99-2.pdf
What we need for 1997-2006 is a similar study.
The problem with the bull/sanguine argument--that everything will work itself out, the warnings about consumers being over-extended have always been proven wrong, etc.--is that it presupposes that there is no limit to the amount of debt the American consumer can absorb.
No one makes the argument that consumers will be able to absorb x% more debt, but they forecast a scenario that requires the consumer to do just that.
Sooner or later, Steve Roach will be right.
I'm not sure that there is a net lag between the extraction and consumption of home equity. After all alot of MEW is used to pay off credit card debt, in which case consumption preceeds the extraction of equity.
Notice the rapidity in transition in the MEW graph between boom and bust. These trends turn on a dime.
Some generalities about who is at risk.
Residential Properties: 83.465m
Mortgaged Properties: 50.570m
w/Fixed Rate Instrument: 37.541m
More at: Residential Finance Survey - Detailed Regional Tables: 2001
Median Value of non-mortgaged properties: $96,038
Residential Finance Survey - Detailed Regional Tables: 2001
Median Value of mortgaged properties: $139,102
Residential Finance Survey - Detailed Regional Tables: 2001
The distribution seems to put disproportionate mortgage exposure in the properties most likely to see the largest declines.
I've been having a discussion with friends about linkages from one real estate market to another, if any.
I have some good friends in India who have been making 80% a year for last 5 years speculating in real estate. Last year we discussed looking together at properties in Vilnius in Eastern Europe, which looked set to appreciate rapidly; but my Indian friends' deals were fast and furious in Chennai and around there, and we dropped idea. Action in one market affected action in another.
Here's a general question about potential financial links between property bubbles:
Are European mortgages bundled and sold off as mortgage backed securities, as they are in the US? A related question is: If so, are the buyers of MBS the same for US mortgages and European mortgages? Final related question: If so, would defaults and devaluation of MBS that originate in the US hurt or drag down real estate markets in Europe?
If hard earned surpluses in Emerging Markets are recycled into rich country housing, are they also buying the risk of the bubbly housing markets with MBS? Or are surpluses only financing US debt and European debt of other kinds?
Just came across a nice centralized collection of statistical highlights at National Mortgage News.
CR - excellent post. Been looking for the update and explaining the approach is helpful. And superb and enhancing comments by all. Perhaps you could put up a post walking us thru the methods in a little more detail at some point ?
On a related topic there's the question of how much direct spending on housing has contributed (which you've covered and cover). But did you see the recent Business Week story on the role of healthcare in job creation. Which has been greatly lagging in this recovery. It's hard to follow there analysis but as a quick spot check, w/o taking about the detailed employment reports, it looks as if there were roughly 3 million jobs created from Jun01 to Jun06 and 1.7 million of them were in healthcare. While obviously over 50% it seems like some other sectors were making smaller contributions though not a lot.
Worth keeping mind as we try to guesstimate the Goldilocks (just right) vs Cinderella (everything MUST be right) economies.
Would it be possible to go one step further and calculate the GDP without MEW and without the growth the residential real estate industry has experience in the past 5 years?
Bob in MA: excellent point
This was perhaps the most enlightening post and statistics about the situation I've read this far. I would like to say it was an excellent, yet very scary post.
Did I understand it correctly that in the recent years, the average homeowner has drawn even more equity out of his house than the tremendous appreciations during that time? I really hope I understood it wrong somehow.
This was perhaps the most enlightening post and statistics about the situation I've read this far. I would like to say it was an excellent, yet very scary post.
Did I understand it correctly that in the recent years, the average homeowner has drawn even more equity out of his house than the tremendous appreciations during that time? I really hope I understood it wrong somehow.
The posts on Mortgage Grapevine - BrokerUniverse
are fascinating.
ac, I'm going to write more about this and estimate the impact of the decline in RI on GDP.
I've also added a note - this analysis assumed consumption was domestic as opposed to flowing to imports - and, in reality, MEW has probably boosted imports signficantly. So MEW wouldn't impact GDP as much as the graph shows. I'll write more about this soon.
aapo, it's not quite that bad - homeowners didn't borrow more than their homes had appreciated. As an example, last quarter in the aggregate, homeowners borrowed 62% of the amount their homes appreciated.
That leaves homeowners with only 38% of the appreciation as equity. At the start of the quarter, homeowners equity was 54.4% - since 38% is less than 54.4% - their equity percentage falls.
It really gets ugly when houses stop appreciating - or values start falling.
Best to all.
Yes, of course, for constant MEW/appreciation ratio, both of them have to increase the same percentage. Well, I thought I was being silly somehow. Silly me.
But, as you said CR, the situation is still ugly; but fortunately not that ugly as I first thought.
Uh huh, I meant MEW/home value ratio, not MEW/appreciation ratio. I better stop now.
Is it possible that people will use credit cards to continue spending ?Maybe the falloff in spending will not be as bad as the MEW data suggests?
It really gets ugly when houses stop appreciating - or values start falling.
/////////////////////////
especially at the same time property
taxes are zooming up....in NJ people looked at their property tax as one would look at an option premium...ie
the cost of the priviledge to owning a big asset in a rising mkt....uh oh
wait till the asset doesn't appreciate and the option premium still goes up in price yearly!!!!
Paarl
Zack, very true about credit cards.
All, from Greg Ip at the WSJ Greenspan Rumors Rattle Treasury Market
During the event, Mr. Greenspan was asked about whether he thought growth or inflation was the greatest risk facing the economy, a question apparently meant to elicit his view on what the Fed should do next. He declined to answer, the people who attended said. As he often has in the past, he noted Paul Volcker refused to discuss monetary policy after Mr. Greenspan succeeded him as chairman, and Mr. Greenspan intended to do the same for his successor, Ben Bernanke.
Mr. Greenspan did say that much of the run-up in housing prices has apparently been due to speculators and investors, not homeowners, and that low interest rates world-wide have played an important role in underpinning housing, the people in attendance said. He also said it is not yet possible to say whether "mortgage equity withdrawal" is yet affecting consumption, and that it may never be possible to know for sure. Mortgage-equity withdrawal, a concept he has popularized in the U.S., refers to the ability of homeowners to increase their purchasing power by taking out larger mortgages.
Best to all.
Zack, credit card usage has spiked appreciably in recent months.
But the amount of credit generally available via plastic is considerably less than that available through one's house.
If consumer spending is now reliant upon credit card usage, spending is probably running on fumes.
Downloading the Excel file of Monthly Treasury Statements for Oct-80 thru Jun-06
, then updating it with the July and Audgust data here and crunching away on it, one can see that total US Treasury receipts for the last 12 months were up 12.66% over the year earlier, which in turn were up 13.14% year-over-year. Considering how stagnant (or falling) have been the incomes of everyone I know, this is quite astounding. Yet it was exactly in this period that the real estate market became first dependent on hyper-loose lending for its last gasp, and then anemic despite continued loose lending.
Then, in August, receipts suddenly fell 1.2% from the previous August.
Is this a harbinger of the economy hitting the wall?
From whence came the income gains that were driving up tax receipts over the previous 24 months? How much came from booming home construction?
If real estate prices were starting to sink even as Treasury tax receipts hit new highs, what's going to happen if the August tax receipt drop indeed heralds a crunch?
Great post, CR. Though it would be nice if you saved scary posts like this for Mondays, so as not to ruin the weekends.
it's crazy to have much equity in your house - it's not working for you
Nor is it working against you. A great many of these must be retired so borrowing no longer makes sense.
I wonder if there might have been some shift in that aproximation of MEW over time. You are using if I understand it 30% of the difference between the growth in mortgage debt outstanding and residential investment. However, recently more and more mortgages are higher LTV's at origination than they used to be. how might this affect the calculations of MEW and the entire analysis?
I keep hearing that boomers are pulling equity out of their homes to finance their retirements that they never planned for so I wonder if the propping up effect will continue for some time...
I am not very convinced that your calculation is correct.
It seems to me that you added 50% of
MEW/GDP to the GDP growth rate, but,
to be consistent with your assumption
that 50% of MEW goes to consumption,
you have to actually subtract 50% of
your estimated MEW from nominal GDP, and then deflate, then calculate growth rate. By doing so, I got very different numbers.