homeowners are crying blue
The Federal Reserve just released another scarecrow by announcing that homeowner equity fell below 50%.
There are several reasons to dismiss this announcement as a clumsy attempt of a rich man to collect alms by putting on bedraggled clothes and diplaying his wounds produced with a brush and a tin can of red paint.
First, in terms of absolute numbers as well as in terms of real purchasing power, homeowner equity is near the all-time highs. The average homeowner is much better off in 2008 that in 2000. To cry wolf when prices retreat some 5% from the maximum (and when I say "prices", I mean actual prices of transactions, not the hedonically adjusted 8.9% reported by Case-Schiller) is like crying about the sorry state of Buffett's finances each time the stock of BRKA experiences a correction.
Second, the losses are on paper. Unless you plan to sell or refinance or unless you need a HELOC, there is no reason to be concerned with prices. All this housing drama is affecting only 15-20% of homeowners who have either bought recently (after 2003), bought a lemon (think 300K houses in the Arizona Desert), or HELOCed themselves to the limit without leaving themselves a cusion.
Third, the ATM machine has grown so fat that even this correction cannot do much damage to it. A 9.65 trillion equity can comfortably sustain HELOC withdrawals at the rate of 700 bln for 10 more years.
Fourth, there is no evidence that indebtedness is growing too fast. While the total market value of house assets fell by approximately 1 trillion, the equity fell from 9.93 trn to 9.65 trl - by less than 300 bln. This number tells us that on the average, the homeowner class has made progress in meeting its mortgage payments. In other words, people who have excess equity are taking some of it for consumption purposes, while other people are making payments and building their equity at about the same rate.
Fifth, even if prices drop 20% from their peak (which nobody really expects save a few permabears on HousingPanic.com), this will merely increase the percentage of homeowners with zero or negative equity from the current 10.3% to 15.9%. In other words, the overwhelming majority is so far away from the danger zone that they can comfortably weather a Category 5 storm that happens once in a 100 years.
The ones who are actually in dire straits are the renters, who outnumber the troubled homeowners 4 to 1 and whose ability to buy a piece of the so-called American dream is near the absolute historical minimum. As usual, the financial media is more concerned with the perceived powerty of the winners scratching their tiny wounds than with real powerty that was created in the process of inflating property values.
In terms of economics, this report is just another attempt by Bernanke to push through a financial bonus package for the people he plays golf with. In terms of social reality, this is a phony attempt to shed a few crocodile tears. Either way, this is precisely the case when the people who are crying should be denied their sugar candy.