It would seem that equity levels have been declining continually since the mid-80s, except for a little bump at the end of the tech stock boom. Don't see anything coming that will reverse this trend, except a lot of people with little or no (or negative) equity losing their homes. Maybe banks will start requiring downpayments again, but that doesn't seem to be happening yet.
I am among those who frequently thinks that the equity withdrawal in this country has been more frivolous than necessary, but it's worth remembering that is not entirely the case.
That means the 66% of homeowners who have a mortgage have an average of 30% equity. I'd really like to know what the distribution is around that average.
CR, I have two general questions on how to look at the possible future impact of this maxing out of the home ATM.
First of all, is anyone predicting that mortgage interest rates (the other part of what is enabling homeowner equity extraction besides rising market values) are going to start rising or that they will remain stable/drop by the Fed opening the spigots? For example, is anyone predicting that a falling dollar or U.S. recession going to increase rates by mopping up the excess liquidity generated by foreign investment in the U.S., or do they think that the Fed will be able to compensate for any credit crunch by increasing money supply and loosening lending standards? In addition, do you think that Bernanke and the Fed will be in danger of getting caught in a liquidity trap if they drop rates and the U.S. consumer is too tapped out or worried about economic conditions to borrow more?
And secondly, how many of these MEWs are being done through instruments that will adjust up with rising interest rates, thus compounding the impact on the consumer? For example, ARMs or adjustable rate HELOCs.
So if homeowners are borrowing nearly all the run-up in equity, and price escalation stops, does that mean that the economy will be short the roughly $700 billion per year that came from the home ATM. That might impact GDP, no?
And if this plays out like 89-95, then average equity for households with a mortgage would decline to about 19%. Given that 15% of mortgage holders today have zero to negative equity, a repeat of the 90's would push that to what, 25-35% probably - impossible to work out exactly without the underlying distribution. Better hope nobody loses their job. Ever.
Great stuff as usual, CR, but I'm confused on your paragraph 2 numbers. Is it the equity or the market value that rose by $194.5B in Q3? If it was the equity, then wouldn't homeowners have borrowed 48% (180/(180+194)) of the increase in market value, not 92%?
Either way, I agree it is a frightening trend, but nothing on your chart indicates a limit to how low that equity percentage can go. It would be interesting, however, to see an overlay of the prevailing mortgage rate on the chart.
Mike, I'll correct that sentence - market values increased $194.5 Billion. Mortgage debt increased $180 Billion ... so equity increased $14.5 Billion in Q3.
Curmudgeonly troll, the Fed's estimate of market value basically follows the OFHEO HPI plus new construction and home improvements. I've checked this before. So the Fed is showing prices up over the last year.
Andrew, Is anyone predicting that a falling dollar or U.S. recession going to increase [mortgage] rates? Yes. I've suggested that possibility several times ... and it will be interesting to see if a vicious cycle develops.
CR, your vicious cycle post seems plausible. However, is there enough liquidity without the foreign CB's to keep rates low?
In other words, in a recession and a U.S. flight from declining equities to relatively stable cash, wouldn't there be alot of money in need of a home and willing to take low returns (supply and demand?)
Added to the extra domestic supply with be reduced domestic demand keeping money cheap...i.e. the recessive economy may/would simultaneously reduce the demand for consumer debt, MEW, new mortgages etc?, no?
CR
As Baby Boomers have started forming households and buying houses from the greatest generation at inflated prices wouldn't you expect the percentage equity to drop? Does this graph correct for the effect of inflation or the effect of hot real estate markets in some parts of the country?
If 34% own outright, then something around 34% of the $194.5 Billion asset appreciation went to them. You can say
less than 34%, if it makes you sleep better.
That means the other 66% are in a deeper hole than before....92% MEW is probably too low....might even find folks somehow managed to do MEW above what's really there. The only other explanation would
be bogus numbers, or that "outright" ownership somehow doesn't include MEWs...which would be stupid, but possible.
"Citing "a dramatic downturn in all segments of the housing market," the maker of windows and doors is cutting 400 positions from its sprawling manufacturing plant in Bayport, Minn. Another 40 jobs are being slashed at an assembly plant in Menomonie, Wis."
The distribution seems to put disproportionate mortgage exposure in the properties most likely to see the largest declines. I'm worried that we cannot offer any incentive to some 15 million who have no skin in the game to stay in the game. I also worry that the govt is going to try and when they do they'll screw those of us with the most skin in some Hobbesian Choice that begins with the govt saying "I'm from the govt and I'm here to help you."
CR:
Note: Typically free and clear homes are older and have a lower market value than newer homes - so you can't just subtract 34% from 53.6% to find the percent equity of homeowners with mortgages.
While it's true people who own their home free and clear tend to live in more modest dwellings, that group no doubt includes the Bill Gateses and Oprahs of the world. So I'm not sure if their equity is necessary less than 34% of the total. Another example of the mean vs. the median.
All, MEW is something less than the increase in mortgage debt. MEW equals the increase in mortgage debt, minus the amount spent on new homes, minus improvements, minus fees (brokers fees when you buy a house), and minus taxes. Some of this data isn't readily available, so I estimate MEW (I'll post something soon).
ML, good points - many wealthy people own their owns free and clear - it's actually very common. However, for the most part, most of the free and clear homes are probably older and less expensive on average than homes with mortgages. It just means we can't subtract the percentages and get a reliable number, but we do know many people with mortgages have little or no (or even negative) equity.
Jim, By dividing total nominal mortgage debt by nominal housing prices (calculated by the Fed from all regions), this graph automatically adjusts for inflation.
Average Joe, that is possible, and any vicious cycle will only last for a short period (maybe a year). However, if there is a recession, I doubt there will be as much liquidity sloshing around. I could easily be wrong.
Thanks for the reply, most informative site on the internet.
2 side notes:
1)you mentioned negative equity....will/do they (Fed) subtract that from the their total equity estimate, if not, they may have to to get an accurate # if things unravel as some expect.
.2)and does the added principal loped onto the mortgage every month from all the minimum payments on option arms get counted anywhere as MEW or otherwise subtracted from total equity?
Average Joe, for these stats, the Fed doesn't care if some individual homeowners have negative equity. They just sum up the total homeowner market value (using some secret formula that is similar to OFHEO's HPI plus adding new homes and improvements) and they also sum up all the mortgage debt (including HELOCs).
So negative amortization loans (like option ARMs) get picked up automatically. The lender reports the total amount due each quarter, and the Fed just adds that up.
Aggregate stats are interesting, but don't tell the entire story. But this is a hint that the homeowners at the margin are getting in deeper trouble - so we should see less equity extraction and more delinquencies next year. And of course the housing market moves at the margin. So just a small percentage of homeowners getting in trouble can put more pressure on the housing market.
From the Fed notes:
(7) Includes loans made under home equity lines of credit and home equity loans secured by junior liens, shown on table L.218, line 22.
rtalcott - I have friends in Andersen mgmt (very high up)... they had been expecting this 'slow down' for a couple of years but were pleasantly surprised that it never seemed to materialize... until now anyway.
Andersen's Bayport plant is the single largest window plant in the country (maybe the world) it is mammoth, I've toured it a couple times and it wears you out walking the place.
But it is also one of the most efficient & focuses on high volume tract home new construction. It will be interesting to see what happens at Marvin, Pella, Peachtree - they do more 'high end' product. If they go soft too & lay off it really is a top to bottom slow down.
The idea that 35 million homeowners own their home free and clear is absolutely incorrect! I've read the report where that 35 million number was stated. There are 35 million free and clear homes in the USA, however, there are three other important factors to consider. 1. This number includes houses that are in such bad repair, no lender will loan money on them. That is replected on the median home price of these 35 million homes being worth 30% less than the median home price for the country. 2. The number 35 million includes all homes owned free and clear by investors. 3. The number includes all the homes owned by foreign people. NAR did a study in Florida to find out the percentage of owners who bought properties free and clear in the year 2005. Some 70% of the time, the buyer did not live in the United States. 35 million homeowners in the uSA do not own their home free and clear.
I found this graph at FDIC on home equity loans interseting CR.
FDIC: QBP Graph Book
It would seem that equity levels have been declining continually since the mid-80s, except for a little bump at the end of the tech stock boom. Don't see anything coming that will reverse this trend, except a lot of people with little or no (or negative) equity losing their homes. Maybe banks will start requiring downpayments again, but that doesn't seem to be happening yet.
What are you trying to say here CR?
That we can't borrow our way to permanent prosperity in an endless virtuous cycle?
I am among those who frequently thinks that the equity withdrawal in this country has been more frivolous than necessary, but it's worth remembering that is not entirely the case.
Error Occurred While Processing Request
Just something worth remembering during discussions on this topic.
That means the 66% of homeowners who have a mortgage have an average of 30% equity. I'd really like to know what the distribution is around that average.
CR, I have two general questions on how to look at the possible future impact of this maxing out of the home ATM.
First of all, is anyone predicting that mortgage interest rates (the other part of what is enabling homeowner equity extraction besides rising market values) are going to start rising or that they will remain stable/drop by the Fed opening the spigots? For example, is anyone predicting that a falling dollar or U.S. recession going to increase rates by mopping up the excess liquidity generated by foreign investment in the U.S., or do they think that the Fed will be able to compensate for any credit crunch by increasing money supply and loosening lending standards? In addition, do you think that Bernanke and the Fed will be in danger of getting caught in a liquidity trap if they drop rates and the U.S. consumer is too tapped out or worried about economic conditions to borrow more?
And secondly, how many of these MEWs are being done through instruments that will adjust up with rising interest rates, thus compounding the impact on the consumer? For example, ARMs or adjustable rate HELOCs.
So if homeowners are borrowing nearly all the run-up in equity, and price escalation stops, does that mean that the economy will be short the roughly $700 billion per year that came from the home ATM. That might impact GDP, no?
And if this plays out like 89-95, then average equity for households with a mortgage would decline to about 19%. Given that 15% of mortgage holders today have zero to negative equity, a repeat of the 90's would push that to what, 25-35% probably - impossible to work out exactly without the underlying distribution. Better hope nobody loses their job. Ever.
If home values drop, then equity will also drop, even without the ongoing extraction.
"Consumer borrowing fell in October by the largest amount in 14 years, reflecting a big drop in auto loans."
I guess the American consumer is officially tapped out - but it was a good run ...
if home values have fallen by 5% in the last year, should that alone drive the percentage down 5 points?
I wonder how the denominator is calculated but am skeptical it's reflecting what's happening in the market.
Great stuff as usual, CR, but I'm confused on your paragraph 2 numbers. Is it the equity or the market value that rose by $194.5B in Q3? If it was the equity, then wouldn't homeowners have borrowed 48% (180/(180+194)) of the increase in market value, not 92%?
Either way, I agree it is a frightening trend, but nothing on your chart indicates a limit to how low that equity percentage can go. It would be interesting, however, to see an overlay of the prevailing mortgage rate on the chart.
Mike, I think it was value of residential real estate, I was looking at the tables myself. In other words, net equity increased $14b (194-180.)
"Consumer borrowing fell in October by the largest amount in 14 years, reflecting a big drop in auto loans."
These goofs that calculate this ...
Last month, they said the same thing - a 1.2% drop. At that time, they revised the previous month's number up by 4 billion.
THIS month, AGAIN they say a 1.2% drop, but they've revised the previous month's number up by over 4 billion again.
I won't put any stock in this month's number until the revision comes next month.
Mike, I'll correct that sentence - market values increased $194.5 Billion. Mortgage debt increased $180 Billion ... so equity increased $14.5 Billion in Q3.
Curmudgeonly troll, the Fed's estimate of market value basically follows the OFHEO HPI plus new construction and home improvements. I've checked this before. So the Fed is showing prices up over the last year.
Andrew, Is anyone predicting that a falling dollar or U.S. recession going to increase [mortgage] rates? Yes. I've suggested that possibility several times ... and it will be interesting to see if a vicious cycle develops.
Best to all.
CR, your vicious cycle post seems plausible. However, is there enough liquidity without the foreign CB's to keep rates low?
In other words, in a recession and a U.S. flight from declining equities to relatively stable cash, wouldn't there be alot of money in need of a home and willing to take low returns (supply and demand?)
Added to the extra domestic supply with be reduced domestic demand keeping money cheap...i.e. the recessive economy may/would simultaneously reduce the demand for consumer debt, MEW, new mortgages etc?, no?
Any thoughts?
CR
As Baby Boomers have started forming households and buying houses from the greatest generation at inflated prices wouldn't you expect the percentage equity to drop? Does this graph correct for the effect of inflation or the effect of hot real estate markets in some parts of the country?
If 34% own outright, then something around 34% of the $194.5 Billion asset appreciation went to them. You can say
less than 34%, if it makes you sleep better.
That means the other 66% are in a deeper hole than before....92% MEW is probably too low....might even find folks somehow managed to do MEW above what's really there. The only other explanation would
be bogus numbers, or that "outright" ownership somehow doesn't include MEWs...which would be stupid, but possible.
A bit OT but:
HOME: St. Paul Pioneer Press - TwinCities.com
Andersen blames housing slowdown for layoffs
"Citing "a dramatic downturn in all segments of the housing market," the maker of windows and doors is cutting 400 positions from its sprawling manufacturing plant in Bayport, Minn. Another 40 jobs are being slashed at an assembly plant in Menomonie, Wis."
rt
30 million have 100% equity.
3 million who bought in 2005 have 0%.
Another 3 million who bought in 2005 have 10% or less. Prorate 2004, 2003, etc.
But that's percent equity. Not a good metric IMO. Lotsa big rounding errors but:
30 million owe $0 on $3.5 trillions worth.
55 million owe $11T on $17.0 trillions worth.
Repeat: Some generalities about who is at risk.
Residential Properties: 83.465m
Mortgaged Properties: 50.570m
w/Fixed Rate Instrument: 37.541m
More at: U.S. Census Bureau: Page not found tab1_1a.html
Median Value of non-mortgaged properties: $96,038
U.S. Census Bureau: Page not found tab2_11.html
Median Value of mortgaged properties: $139,102
U.S. Census Bureau: Page not found tab2_10.html
The distribution seems to put disproportionate mortgage exposure in the properties most likely to see the largest declines. I'm worried that we cannot offer any incentive to some 15 million who have no skin in the game to stay in the game. I also worry that the govt is going to try and when they do they'll screw those of us with the most skin in some Hobbesian Choice that begins with the govt saying "I'm from the govt and I'm here to help you."
And now for the good news. Oops, there isn't any.
CR:
Note: Typically free and clear homes are older and have a lower market value than newer homes - so you can't just subtract 34% from 53.6% to find the percent equity of homeowners with mortgages.
Robert Coté:
Median Value of non-mortgaged properties: $96,038
U.S. Census Bureau: Page not found tab2_11.html
Median Value of mortgaged properties: $139,102
U.S. Census Bureau: Page not found tab2_10.html
While it's true people who own their home free and clear tend to live in more modest dwellings, that group no doubt includes the Bill Gateses and Oprahs of the world. So I'm not sure if their equity is necessary less than 34% of the total. Another example of the mean vs. the median.
All, MEW is something less than the increase in mortgage debt. MEW equals the increase in mortgage debt, minus the amount spent on new homes, minus improvements, minus fees (brokers fees when you buy a house), and minus taxes. Some of this data isn't readily available, so I estimate MEW (I'll post something soon).
ML, good points - many wealthy people own their owns free and clear - it's actually very common. However, for the most part, most of the free and clear homes are probably older and less expensive on average than homes with mortgages. It just means we can't subtract the percentages and get a reliable number, but we do know many people with mortgages have little or no (or even negative) equity.
Jim, By dividing total nominal mortgage debt by nominal housing prices (calculated by the Fed from all regions), this graph automatically adjusts for inflation.
Average Joe, that is possible, and any vicious cycle will only last for a short period (maybe a year). However, if there is a recession, I doubt there will be as much liquidity sloshing around. I could easily be wrong.
Best to all.
Calculated Risk,
Thanks for the reply, most informative site on the internet.
2 side notes:
1)you mentioned negative equity....will/do they (Fed) subtract that from the their total equity estimate, if not, they may have to to get an accurate # if things unravel as some expect.
.2)and does the added principal loped onto the mortgage every month from all the minimum payments on option arms get counted anywhere as MEW or otherwise subtracted from total equity?
Average Joe, for these stats, the Fed doesn't care if some individual homeowners have negative equity. They just sum up the total homeowner market value (using some secret formula that is similar to OFHEO's HPI plus adding new homes and improvements) and they also sum up all the mortgage debt (including HELOCs).
So negative amortization loans (like option ARMs) get picked up automatically. The lender reports the total amount due each quarter, and the Fed just adds that up.
Aggregate stats are interesting, but don't tell the entire story. But this is a hint that the homeowners at the margin are getting in deeper trouble - so we should see less equity extraction and more delinquencies next year. And of course the housing market moves at the margin. So just a small percentage of homeowners getting in trouble can put more pressure on the housing market.
Best Wishes.
Is HELOC considered a mortgage loan or part of some other debt pile?
ron, HELOC is included.
From the Fed notes:
(7) Includes loans made under home equity lines of credit and home equity loans secured by junior liens, shown on table L.218, line 22.
Best regards.
Andersen blames housing slowdown for layoffs
rtalcott - I have friends in Andersen mgmt (very high up)... they had been expecting this 'slow down' for a couple of years but were pleasantly surprised that it never seemed to materialize... until now anyway.
Andersen's Bayport plant is the single largest window plant in the country (maybe the world) it is mammoth, I've toured it a couple times and it wears you out walking the place.
But it is also one of the most efficient & focuses on high volume tract home new construction. It will be interesting to see what happens at Marvin, Pella, Peachtree - they do more 'high end' product. If they go soft too & lay off it really is a top to bottom slow down.
The idea that 35 million homeowners own their home free and clear is absolutely incorrect! I've read the report where that 35 million number was stated. There are 35 million free and clear homes in the USA, however, there are three other important factors to consider. 1. This number includes houses that are in such bad repair, no lender will loan money on them. That is replected on the median home price of these 35 million homes being worth 30% less than the median home price for the country. 2. The number 35 million includes all homes owned free and clear by investors. 3. The number includes all the homes owned by foreign people. NAR did a study in Florida to find out the percentage of owners who bought properties free and clear in the year 2005. Some 70% of the time, the buyer did not live in the United States. 35 million homeowners in the uSA do not own their home free and clear.