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EScroogeJr (< 20)

homeowners are crying blue



March 07, 2008 – Comments (9)

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, 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.

9 Comments – Post Your Own

#1) On March 07, 2008 at 3:12 PM, DemonDoug (31.50) wrote:

Seriously man, what are you smoking?  I really need some, all my connections dried up recently because no one could pay for his stuff because they couldn't HELOC their homes for it anymore.  I've got the money, because I rent I don't have an alligator eating me alive and I build equity the old fashioned way, by saving it.  I mean, it seems like really good stuff! It's been too long since me and the mad hatter and the caterpillar asked me who I was n stuff.

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#2) On March 07, 2008 at 3:41 PM, EScroogeJr (< 20) wrote:

Demon, I'm smoking nothing but the numbers that just came from the Federal Reserve. And these numbers give the picture of an affluent majority of homeowners, a pauperized class of renters,  and a few stupid homeowners who got themselves into trouble.

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#3) On March 07, 2008 at 5:29 PM, AnomaLee (28.87) wrote:

(1)"All this housing drama is affecting only 15-20% of homeowners who have...."

(2)"this will merely increase the percentage of homeowners with zero or negative equity from the current 10.3% to 15.9%...."

I'm with DemonDoug. What are you smoking?

First, we are discussing people where these statistics represent human beings. Probably irresponsible people, but these are still are still people and [just as important to corporate America and Uncle Sam] they are working consumers that generate tax revenue.

Secondly, we are discussing economics where a mere 50 basis points represent a shift in billions of dollars if done by the Fed or put into the scope of the mortgage lending industry. The difference in the numbers that you have you figured are huge.


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#4) On March 07, 2008 at 6:21 PM, EScroogeJr (< 20) wrote:

AnomalLee, I gave you the numbers. Equity is shrinking slower than assets, which means that the outstanding date is being repaid. If you want me to forget arithmetical rules of addition and subtraction and start crying, sorry, I'm not that emotional. 

Your suggestion that the economic impact of an extra 5.6% of homeowners with zero equity will be huge is pure wishful thinking. If you owe $100,000 on a $110,000 house, you cannot take a HELOC loan anyway.  If the price of similar houses drops to $100,000, this will affect the HECOCs of people with debt of $90,000-100,000, but those who own the place free and clear can still safely take their HELOC regardless of price swings. Either way, the house ATM machine retains the majority of its customers who are also responsible for the lion's share of withdrawals, because the troubled homeowners dropping out of the system could borrow so little money anyway.

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#5) On March 07, 2008 at 6:23 PM, EScroogeJr (< 20) wrote:

"outstanding debt", of course. Sorry for the typo.

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#6) On March 07, 2008 at 6:52 PM, eldemonio (97.90) wrote:

Thanks for the upbeat news.  I'll feel much better about going home to my upside down mortgage that I stupidly got myself into. 

I guess I should have foreseen that my home's value was going to plunge 10% during the past year before I bought it 4 years ago.  I guess I should have put more money down, should've bought in a nicer neighborhood, should've moved out before prices fell.

Fact is, I bought what I could afford at the time - in a neighborhood that was as nice as I could afford at the time, and I put down what I could afford at the time.

The implication that everybody who is feeling the crunch is stupid or irresponsible is, well, stupid and irresponsible.

What's your point? - That things are not as bad as reported?  That Benanke is a lying bastard? 

Back in the day (50s) - homeowners had 80% equity in their homes - that has dropped to 50% today.  That may not seems like a major factor in the upcoming economic downturn - but taken in context with all other indicators - inflation, recession, the dollar losing value, etc. - the stupid irresponsible homeowners won't be the only ones who will suffer.

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#7) On March 07, 2008 at 7:08 PM, EScroogeJr (< 20) wrote:

What's my point? My point is that I'm upside down on BWLD, but I don't go blogging about how everybody should pity me for my misfortune, how the economy will come to an end unless my equity in BWLD is reinflated and how peasants in Zimbabwe should subsidize the price of chicken wings to make my investment whole.

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#8) On March 08, 2008 at 9:30 PM, dwot (28.99) wrote:

Best satire I've read all evening...

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#9) On March 08, 2008 at 11:13 PM, EScroogeJr (< 20) wrote:

dwot, could you please indicate which of the following statements you disagree with?

1. Homeowner equity, when measured in dollar amounts, is still near its historical maximum.

2.  A 9.65 trillion equity can comfortably sustain HELOC withdrawals at the rate of 700 bln for 10 more years.

3. If people withdrew more cash from the system than they put into it, equity would have fallen faster than the asset base. Instead, it decreased by a lesser amount.

4. 84.1% of homeowners would be in the green if prices fell 20% from the peak.

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