The two numbers are not really related. GDP is a consumption value assigned to a fiscal year (income statement item). Mortgage debt is a snapshot of collective loan balances (balance sheet item). The GDP is used in the article as a benchmark to highlight the maganitude of the debt.
Kett82, I wouldn't look at it that way. The debt to GDP ratio gives a feel for leverage changes in the economy, but it doesn't tell you the right level of debt.
Borrowing has helped GDP in recent years; mainly it has helped fuel both the housing market and consumer spending. So if consumers stopped borrowing, GDP would still grow, but at a slower pace (all else equal).
So we want to look at the change in mortgage debt (when trying to determine the impact on GDP).
Paying off all the mortgage debt in the aggregate is not desireable and will never happen. But reducing mortgage debt as a percent of GDP will probably happen and will most likely slow GDP growth.
Wow, look at the 2nd quarter rise in mortgage debt YOY -- a dramatic decrease. Look at the pattern going back 5 years. 2nd quarter is always substantially more than first quarter, at least on a percentage basis. But in 2006, the percentage increase is miniscule.
Looks as if the velocity of credit is rapidly slowing. Not good for an economy reliant on credit expansion for growth.
Of course, the July starts were revised down (from 1.795). If compared to July's unrevised number, the actual percentage drop was 7.3%, not 6% as now being offered for Wall Street's consumption.
And, according to the Fed estimates, the value of household real estates was still rising in Q2, 2006. Imagine what happens when values start to decline.
CR - have you done a 'sensitivity analysis' to see what these numbers would look like a couple quarters out...
1) if equity extraction goes at approximately the same pace and...
2) if housing assets had a nominal decline of say 10%-15% overall (pick a number)
How bad would these have to get to make a difference in market behavior (behavior of those lending to us)?
I seem to recall that the value of the US Stock market to GDP back around the hight of the internet bubble was ~115% - 125%. It was a clear indicator that the market was overvalued (calling when that would reverse is a whole other issue and game of luck) but this Mtge debt as a % of GDP is equally as scary. I read that it took $3 - $4 of debt to generate $1 of GDP last year. That is not sustainable and the hangover will be nasty.
Kett82,
I just re-read my own post. In an attempt to be brief, it's wrong. I meant that people are not going to suddenly pay off their mortgages with money extracted from consumption. Thanks CR for the clarification.
Next time I'll edit, then post.
Thanks all for the clarifications. I think I have a better understanding. It is just mind-blowing to think about all that debt.
Didn't mean to get you folks sidetracked. Please return to your regular programming.
Kett,
Fretting about massive amounts of debt (mtg, fed, consumer, current accout) IS the regular programing here. Not just the levels but the ability to pay them (hence discussions of employment levels, wage growth and GDP) Sort of like horror movies for "ubernerds".
Somewhat off topic, but I'm seeing more anger directed at this blog and others like it. Maybe it's nothing, but it may indicate that pain is hitting more and more people (i.e., underwater real estate investors, realtors, etc.).
The "tell" for me was when a poster wished a heart attack on Mike Shedlock.
My interpretation is that we're moving from the "denial" to the "anger" stage, and the anger is being directed at the messenger.
The "tell" for me was when a poster wished a heart attack on Mike Shedlock.
Ya I saw that over on Mish - people are getting excited for sure.
I have a 'friend' who owns a number of houses he bought to repair & flip... all so called 'ugly houses'. Last year he flipped 3-4 just like that and for good money too. Right now he's sitting on seven unsold... some have been finished since April-May and haven't had an offer on them.
I don't discuss real estate with him. Or business. Or really much of anything these days. He's a bit 'tense'.
What are the alternative hard landing scenarios? Weve heard on from Tanta (who, I believe, has forgotten more about this problem than I will ever learn about it..) As I recall, during the S&L crisis, buyers of defunct thrifts chose or negotiated what loans they wanted to keep. An acquaintance bought a thrift keeping only treasury bills and notes. He was given the option of returning to the liquidator any or all of his loan portfolio within three months of purchase, effectively giving him a free put on the portfolio! But interest rates fall almost continuously during that period and kept falling for years. I believe he made a lot of money. His only regret was not keeping even more loans.
A client bought a defaulted strip mall at about the same time using non recourse financing. The defaulted mortgage was $500k. He and his two partners put up $10k each and bought the mortgage for $130k. When the $30k was gone, the bank would get the strip mall back with no recourse. The bank was happy to have a performing loan and my client took a shot. I dont know if the deal worked out, because I moved away.
Remember when New York City was facing bankruptcy? Rohatyn organized a workout.
The point is, no one wants defaulted mortgages: not the government, not banks, not squeezed home owners. Most people at risk in a potential mess, will work hard and creatively to solve the problem. I wonder what some of the financial solutions to the housing bubble will look like. And will they be enough to avoid a severe economic downturn?
dryfly, I haven't spent any time looking at those numbers a couple of quarters out. I doubt we will see a significant decline in nominal prices in just a couple of quarters - it usually takes years. I'll take a look and see what makes sense.
How bad would it have to get to change behavior? There is no clear answer to that question. I think falling prices (announced by OFHEO) will change psychology. Also hearing about job losses and significant foreclosures. The economy is getting there.
trader walt, If there are a significant number of foreclosures, I think there will be a move to repeal the new bankruptcy law. That will probably be the only "financial solution" to the bursting bubble, unless some major financial institutions are threatened.
"Imagine what happens when values start to decline."
If the house you purchased in 2004 for say, $300,000 is now worth $415,000 and it declines in appraised by value by 10%.....it will be worth only $373,000. And, if you put down 10%, you not only have a 243% increase on your money but still have a fine place to live.
I think the bankruptcy "reform" law has contributed to the glut of consumer debt. I have to believe lenders have become more emboldened to issue credit.
MtHood, It is interesting to see the anger in these threads. It's great to hear different views. But the posts dissenting with the majority here are just insults and sarcasm with no information or analysis. I'd like to hear an educated view that's bullish on RE prices.
Just read an interesting tale in the WaPoo, Metro Section, about a builder who defaulted on construction and is charged with fraud by not paying subs. He talked the buyers into getting construction loans so now they are holding the bag on the loan and don't have a completed house. OUCH!!
"But the posts dissenting with the majority here are just insults and sarcasm with no information or analysis. I'd like to hear an educated view that's bullish on RE prices."
Here's the view from my perch.
A year or so ago you could hear a bullish case for real estate that cited data or contained a line of reasoning. Since the data has gone so bad, you don't hear a RE bull reference data, unless it's along the lines of "2005 was an aberration, compared to 2004 were still doing well. Sometimes you hear hope after the speculator inventory is cleared, things will get better but not so much lately.
A year or so ago you would hear taunts and confidence from RE bulls: youre a bitter priced-out renter or a chicken little. My condo is up 65%. Now, I agree with you, insults and sarcasm AND anger.
It makes sense and it was predictable, but its also so striking to read it and hear it.
trader walt, back in the days of my fresh-faced, exuberant youth, I took a job in a soon-to-be-technically-insolvent thrift in the mortgage department. On my first day, they took a bunch of us to the large building across the street for an orientation session. "Wow," I said, "I had no idea Goodwill Accounting Federal is big enough for two whole buildings! We must be doing great!"
That was the day I learned the meaning of "REO." Turns out we owned four empty buildings downtown . . . .
CR, I hope you're right. Repealing the BK Bill would at least be getting something worthwhile out of the Rocky Horror Mortgage Show.
But if you add short-term debt (credit cards, auto loans, etc) the ratio is 93.7%. And the ratio of this total debt to after tax income is 130%. Next we lower GDP due to stagnant housing construction and the ratios rise even more.
"If the house you purchased in 2004 for say, $300,000 is now worth $415,000 and it declines in appraised by value by 10%.....it will be worth only $373,000. And, if you put down 10%, you not only have a 243% increase on your money but still have a fine place to live."
Nice cherry-picking of facts there, bud.
Let's say you graduated from college in 2004 and finally saved up enough to pay the closing costs on the 80/20 loan for that house in 2006. It was $300,000 when you graduated but you bought it for $415,00 with an IO loan that has the same payment as the $300,000 loan the PO had.
Now you go down 10% to $373,000 and your net worth is $42,000 less than when you started.
So you'll go on making your payment and have a "fine place to live", right? Well, no, since that $415,000 only bought you a marginal townhouse in a dangerous neighborhood that you're now trapped in.
Now THAT's a more realistic scenario facing house buyers in California.
What makes you think they can afford to stay? I can understand, in the lending environments of yore, there'd be a chance a homeowner could weather the storm -- but nowadays, the chance many home buyers can hold out (many meaning enough to tip a market) - are considerably slimmer and the overall debt environment is considerably worse.
I think it can never be said too often on any of these blogs: as an asset a house is worth what you can get for it. Let's say there are 10 comparable houses available at that $373,000. Let's say two are actually sold at that price in the course of the month (generous enough assumption for most places, considering inventory and sale rates.) If you own one of the other 8. Is your house "worth" $373,000 in that month? I would say not. If your house isn't even on the market, is it worth $373,000 that month? With only a 1 in 5 chance of selling it, the answer would be no. Hence the danger of comparables in an overstuffed market, considering the interesting phenomenon of "sticky prices." Is it worth $372,000? In a perfect market, yes - the sale would clear at that level. But real estate is nothing close to a perfect market. So what is your house worth? It's worth whatever price (minus expenses) would GUARANTEE a sale this month in this environment of oversupply and buyer bear psychology. I haven't any idea what discount from $373,000 would be - but the savvier real estate types on this blog might be able to guess.
And that's what it's worth this month. What it will be worth next month is a mug's game.
Let me get this straight: If we paid off all the mortgage debt, the U.S. GDP would shrink by nearly 80%
Is that right?
Kett82: That is not even remotely right.
Mr. Bear - What is the national leverage when we factor in consumer debt, and then with municipal, state and federal obligations tied in?
The balance sheet of this country is a nightmare.
The two numbers are not really related. GDP is a consumption value assigned to a fiscal year (income statement item). Mortgage debt is a snapshot of collective loan balances (balance sheet item). The GDP is used in the article as a benchmark to highlight the maganitude of the debt.
Kett82, I wouldn't look at it that way. The debt to GDP ratio gives a feel for leverage changes in the economy, but it doesn't tell you the right level of debt.
Borrowing has helped GDP in recent years; mainly it has helped fuel both the housing market and consumer spending. So if consumers stopped borrowing, GDP would still grow, but at a slower pace (all else equal).
So we want to look at the change in mortgage debt (when trying to determine the impact on GDP).
Paying off all the mortgage debt in the aggregate is not desireable and will never happen. But reducing mortgage debt as a percent of GDP will probably happen and will most likely slow GDP growth.
Best Wishes.
On the heels of the biggest housing run in history we see a dip in equity and a rise in debt service:income?
Shocking!
Disaster is surely at hand.
Wow, look at the 2nd quarter rise in mortgage debt YOY -- a dramatic decrease. Look at the pattern going back 5 years. 2nd quarter is always substantially more than first quarter, at least on a percentage basis. But in 2006, the percentage increase is miniscule.
Looks as if the velocity of credit is rapidly slowing. Not good for an economy reliant on credit expansion for growth.
Ahh - where is General Glut when we need him?
The cows are certainly coming home to roost.
Of course, the July starts were revised down (from 1.795). If compared to July's unrevised number, the actual percentage drop was 7.3%, not 6% as now being offered for Wall Street's consumption.
And, according to the Fed estimates, the value of household real estates was still rising in Q2, 2006. Imagine what happens when values start to decline.
CR - have you done a 'sensitivity analysis' to see what these numbers would look like a couple quarters out...
1) if equity extraction goes at approximately the same pace and...
2) if housing assets had a nominal decline of say 10%-15% overall (pick a number)
How bad would these have to get to make a difference in market behavior (behavior of those lending to us)?
Have you put any thought into that?
I seem to recall that the value of the US Stock market to GDP back around the hight of the internet bubble was ~115% - 125%. It was a clear indicator that the market was overvalued (calling when that would reverse is a whole other issue and game of luck) but this Mtge debt as a % of GDP is equally as scary. I read that it took $3 - $4 of debt to generate $1 of GDP last year. That is not sustainable and the hangover will be nasty.
Kett82,
I just re-read my own post. In an attempt to be brief, it's wrong. I meant that people are not going to suddenly pay off their mortgages with money extracted from consumption. Thanks CR for the clarification.
Next time I'll edit, then post.
Dear All
Thanks all for the clarifications. I think I have a better understanding. It is just mind-blowing to think about all that debt.
Didn't mean to get you folks sidetracked. Please return to your regular programming.
Regards,
It is just mind-blowing to think about all that debt.
Only if you have a mind.
Kett,
Fretting about massive amounts of debt (mtg, fed, consumer, current accout) IS the regular programing here. Not just the levels but the ability to pay them (hence discussions of employment levels, wage growth and GDP) Sort of like horror movies for "ubernerds".
Somewhat off topic, but I'm seeing more anger directed at this blog and others like it. Maybe it's nothing, but it may indicate that pain is hitting more and more people (i.e., underwater real estate investors, realtors, etc.).
The "tell" for me was when a poster wished a heart attack on Mike Shedlock.
My interpretation is that we're moving from the "denial" to the "anger" stage, and the anger is being directed at the messenger.
The "tell" for me was when a poster wished a heart attack on Mike Shedlock.
Ya I saw that over on Mish - people are getting excited for sure.
I have a 'friend' who owns a number of houses he bought to repair & flip... all so called 'ugly houses'. Last year he flipped 3-4 just like that and for good money too. Right now he's sitting on seven unsold... some have been finished since April-May and haven't had an offer on them.
I don't discuss real estate with him. Or business. Or really much of anything these days. He's a bit 'tense'.
What are the alternative hard landing scenarios? Weve heard on from Tanta (who, I believe, has forgotten more about this problem than I will ever learn about it..) As I recall, during the S&L crisis, buyers of defunct thrifts chose or negotiated what loans they wanted to keep. An acquaintance bought a thrift keeping only treasury bills and notes. He was given the option of returning to the liquidator any or all of his loan portfolio within three months of purchase, effectively giving him a free put on the portfolio! But interest rates fall almost continuously during that period and kept falling for years. I believe he made a lot of money. His only regret was not keeping even more loans.
A client bought a defaulted strip mall at about the same time using non recourse financing. The defaulted mortgage was $500k. He and his two partners put up $10k each and bought the mortgage for $130k. When the $30k was gone, the bank would get the strip mall back with no recourse. The bank was happy to have a performing loan and my client took a shot. I dont know if the deal worked out, because I moved away.
Remember when New York City was facing bankruptcy? Rohatyn organized a workout.
The point is, no one wants defaulted mortgages: not the government, not banks, not squeezed home owners. Most people at risk in a potential mess, will work hard and creatively to solve the problem. I wonder what some of the financial solutions to the housing bubble will look like. And will they be enough to avoid a severe economic downturn?
dryfly, I haven't spent any time looking at those numbers a couple of quarters out. I doubt we will see a significant decline in nominal prices in just a couple of quarters - it usually takes years. I'll take a look and see what makes sense.
How bad would it have to get to change behavior? There is no clear answer to that question. I think falling prices (announced by OFHEO) will change psychology. Also hearing about job losses and significant foreclosures. The economy is getting there.
trader walt, If there are a significant number of foreclosures, I think there will be a move to repeal the new bankruptcy law. That will probably be the only "financial solution" to the bursting bubble, unless some major financial institutions are threatened.
Best to all.
"Imagine what happens when values start to decline."
If the house you purchased in 2004 for say, $300,000 is now worth $415,000 and it declines in appraised by value by 10%.....it will be worth only $373,000. And, if you put down 10%, you not only have a 243% increase on your money but still have a fine place to live.
I think the bankruptcy "reform" law has contributed to the glut of consumer debt. I have to believe lenders have become more emboldened to issue credit.
MtHood, It is interesting to see the anger in these threads. It's great to hear different views. But the posts dissenting with the majority here are just insults and sarcasm with no information or analysis. I'd like to hear an educated view that's bullish on RE prices.
Just read an interesting tale in the WaPoo, Metro Section, about a builder who defaulted on construction and is charged with fraud by not paying subs. He talked the buyers into getting construction loans so now they are holding the bag on the loan and don't have a completed house. OUCH!!
Lama said:
"But the posts dissenting with the majority here are just insults and sarcasm with no information or analysis. I'd like to hear an educated view that's bullish on RE prices."
Here's the view from my perch.
A year or so ago you could hear a bullish case for real estate that cited data or contained a line of reasoning. Since the data has gone so bad, you don't hear a RE bull reference data, unless it's along the lines of "2005 was an aberration, compared to 2004 were still doing well. Sometimes you hear hope after the speculator inventory is cleared, things will get better but not so much lately.
A year or so ago you would hear taunts and confidence from RE bulls: youre a bitter priced-out renter or a chicken little. My condo is up 65%. Now, I agree with you, insults and sarcasm AND anger.
It makes sense and it was predictable, but its also so striking to read it and hear it.
Sort of like horror movies for "ubernerds"
Word.
trader walt, back in the days of my fresh-faced, exuberant youth, I took a job in a soon-to-be-technically-insolvent thrift in the mortgage department. On my first day, they took a bunch of us to the large building across the street for an orientation session. "Wow," I said, "I had no idea Goodwill Accounting Federal is big enough for two whole buildings! We must be doing great!"
That was the day I learned the meaning of "REO." Turns out we owned four empty buildings downtown . . . .
CR, I hope you're right. Repealing the BK Bill would at least be getting something worthwhile out of the Rocky Horror Mortgage Show.
Mortgage debt is now at a record 70.6% of GDP.
But if you add short-term debt (credit cards, auto loans, etc) the ratio is 93.7%. And the ratio of this total debt to after tax income is 130%. Next we lower GDP due to stagnant housing construction and the ratios rise even more.
But there will be no hard landing in real estate! Check out
Mish's Global Economic Trend Analysis: No Hard Landing
"If the house you purchased in 2004 for say, $300,000 is now worth $415,000 and it declines in appraised by value by 10%.....it will be worth only $373,000. And, if you put down 10%, you not only have a 243% increase on your money but still have a fine place to live."
Nice cherry-picking of facts there, bud.
Let's say you graduated from college in 2004 and finally saved up enough to pay the closing costs on the 80/20 loan for that house in 2006. It was $300,000 when you graduated but you bought it for $415,00 with an IO loan that has the same payment as the $300,000 loan the PO had.
Now you go down 10% to $373,000 and your net worth is $42,000 less than when you started.
So you'll go on making your payment and have a "fine place to live", right? Well, no, since that $415,000 only bought you a marginal townhouse in a dangerous neighborhood that you're now trapped in.
Now THAT's a more realistic scenario facing house buyers in California.
"Nice cherry-picking of facts there, bud."
I guess I struck a nerve by my example. But, in your example: They won't leave the house either!
"They won't leave the house either!"
What makes you think they can afford to stay? I can understand, in the lending environments of yore, there'd be a chance a homeowner could weather the storm -- but nowadays, the chance many home buyers can hold out (many meaning enough to tip a market) - are considerably slimmer and the overall debt environment is considerably worse.
I think it can never be said too often on any of these blogs: as an asset a house is worth what you can get for it. Let's say there are 10 comparable houses available at that $373,000. Let's say two are actually sold at that price in the course of the month (generous enough assumption for most places, considering inventory and sale rates.) If you own one of the other 8. Is your house "worth" $373,000 in that month? I would say not. If your house isn't even on the market, is it worth $373,000 that month? With only a 1 in 5 chance of selling it, the answer would be no. Hence the danger of comparables in an overstuffed market, considering the interesting phenomenon of "sticky prices." Is it worth $372,000? In a perfect market, yes - the sale would clear at that level. But real estate is nothing close to a perfect market. So what is your house worth? It's worth whatever price (minus expenses) would GUARANTEE a sale this month in this environment of oversupply and buyer bear psychology. I haven't any idea what discount from $373,000 would be - but the savvier real estate types on this blog might be able to guess.
And that's what it's worth this month. What it will be worth next month is a mug's game.
Have to remember that Larry runs a blog on how to get rich in real estate. Long part of the "There is No Bubble!" camp.
His argument was just a variation of the
"Don't you wish you bought two years ago?"
argument.
Typical backwards-looking realtorspeak.
And FIY, it didn't strike a nerve, it just wasn't accurate for today's buyers.