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Reduced Home Equity Spending ENORMOUS!

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June 14, 2008 – Comments (12)

Paul Kasriel has a piece on the wealth effect.  It only relates to a part of the wealth effect, where people pull home equity to spend on other things.  The wealth effect says that as we see our paper wealth fall, we tend to spend less.

I am not sure how much the reduced spending from home equity loans is about the wealth effect and how much is about the reduced ability to borrow, and I tend to think a great deal of it is about the latter.

In any event, the reduced home equity loans are enormous, from "at an annualized rate, active MEW peaked at $576 billion in the second quarter of 2006. Active Mew has slowed to only $114 billion in the first quarter of this year."

If the total economy is something like $13 trillion, that alone is a 3.6% decline in available spending by consumers. 

Better put a few notches into the belt for tightening... 

12 Comments – Post Your Own

#1) On June 14, 2008 at 3:37 PM, alstry (34.92) wrote:

I have seen some estimates as high as $1 Trillion.  The total economy is $13 Trillion.  Consumer spending is much less so MEW was much higher than 5% of consumer spending...and that was after tax dollars. 

MEW had an enormous impact on the economy.  The multiplier effect was even more significant as many jobs depended on its customers spending MEW and they in turn spent into the economy.

Think about how many restaurants, car dealerships, retailers, spas, and vacation spots are now going to go out of business because consumers can no longer extract equity out of their homes and it costs 4X to fly anywhere.

Not only that, think emotional impact when people think their perceived equity in their home is now illusory.  They see their bond portfolios crashing.  And maybe soon, their stock portfolios?

My friend, for many MEW was the difference between a BMW and Bankruptcy.  Lurxury car sales are down 100K units this year.

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#2) On June 14, 2008 at 3:49 PM, alstry (34.92) wrote:

MEW reduction is also going to have a HUGE impact on tax revenues.

Take your typical free standing casual dining restaurant generating $3 million in revenues.  It probably pays over $100K in property taxes and over $250K in sales taxes and another $150K in income taxes.  Its employees generate over $200K in various taxes.

Think about all the businesses that are going to fail and the taxes not paid as a result....the number is huge which in turn is going to result in additional government cutbacks.

The contraction goes on and on.........................when will people wake up?

 

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#3) On June 14, 2008 at 4:05 PM, abitare (31.77) wrote:

aligned. I would underperform all retail, restaurants, regionial banks, mortgage companies, real estate, discretionary income etc. if I had more position. I am not sure what is holding this market up. Plunge protection team?

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#4) On June 14, 2008 at 4:52 PM, EScroogeJr (< 20) wrote:

I strongly disagree. American consumers will not cut spending as long as have any equity to spend. $10 trillion equity in RE? $20 trn in stocks? Cash flow that goes into 401K? They will spend it all to the last cent before even considering the idea of belt-tightening. A mere trillion a year? The apocalypse is some 40 years away at this rate, and to suggest that assets won't gain any value during that time, you must be not just a permabear, but an enornous brown grizzly.

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#5) On June 14, 2008 at 5:49 PM, alstry (34.92) wrote:

Scrooge,

With over $10 Trillion of outstanding mortgages, home equity will go negative if home price fall another 30-40%.  Right now about 10%-15% of the housing stock has negative equity and growing rapidly.  Home equity is the lowest since the great depression.  If prices fall another 20%, over 50% of mortgages will be under water.

401Ks are being stripped to meet rising monthly expenses now that the MEW is no longer available.

The stock market crashed 70% in 1973 when inflation was an issue without a credit crisis.

So let's see, no 401K, equities worth less than $6 Trillion and consumer debt at over $10 Trillion without factoring auto or revolver debt.

The apocalypse could be next week!!!!!

We still havn't addressed the layoffs, rising commercial vacancies, record government deficits, and shrinking revenues.

It is amazing how rich people think they are when living in a bubble.

 

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#6) On June 14, 2008 at 5:57 PM, EScroogeJr (< 20) wrote:

alstry, I don't think I'm rich. Actually, I think my only chance to get rich is if something like what you suggest comes to pass.

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#7) On June 14, 2008 at 6:22 PM, abitare (31.77) wrote:

aligned with alstry.

Except I have no idea how or when this will end. 

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#8) On June 14, 2008 at 6:25 PM, alstry (34.92) wrote:

My guess is that it will pass sooner than you think.

Remember, stock market value is a perception of value and earnings.  It can change in an instant....especially when an economy is leveraged.

One day Bear Streans is worth tens of billions, the next day practically nothing.

We are living in world of illusory earnings.  Auto companies are losing billions, Airlines are losing billions, Builders are losing billions, Banks are losing billions......heck we havn't even gotten past B.  You think if banks can't make money in the current environment, you can for any lenth of time?

We are living in a period where earning money is becoming more and more difficult.  Not only are revenues shrinking, but costs are going nuts.  Especially if you run your own business.

Any paradigm shift is difficult for a society to accept, this one is going to be revolutionary.  It is the only explanation I can give for the BS that is being condoned right now.

How long can food and fuel rise, interest rates increase, revenues remain stagnant or decrease, and not have the society riot.

You may want to take a look at Europe right now for some insight....and they are buying commodities in stronger Euros.

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#9) On June 14, 2008 at 7:38 PM, EScroogeJr (< 20) wrote:

"We are living in world of illusory earnings.  Auto companies are losing billions, Airlines are losing billions, Builders are losing billions, Banks are losing billions......heck we havn't even gotten past B"

Oh, come on. 90% of US economy is BS, and you don't need cheap oil to produce BS. All you need for that is lots of suits and neckties.

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#10) On June 15, 2008 at 10:17 AM, mandrake66 (92.06) wrote:

Oh, come on. 90% of US economy is BS, and you don't need cheap oil to produce BS. All you need for that is lots of suits and neckties.

I disagree. Suits and neckties are unnecessary. You can produce BS naked, or in a clown costume. You might need a suit and necktie to sell it, but even there, count me dubious. All you really need is a good advertising campaign.

We built this country with guns, trinkets, liquor, and cheap labor, and we're still loaded with all four.

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#11) On June 15, 2008 at 12:45 PM, dwot (42.57) wrote:

astry, the article gives actual figures on the values of home equity loans and they are annualized.  I believe it is looking at the highest to the current, so that trillion dollar estimate looks high.  But then, I've never checked out the quality of Kasriel's math or sources.  If home equity loans maxed at $576 billion on an annualized basis, then the most decline you could get is $576 billion.  That's what I understood the article to be saying.

There could be "declines" in other ways, people pay less on the their mortgage and therefore pay less principal down.  We were hit in a way that we ended up reducing what we were paying towards mortgage by about $1500/month, so in a very indirect way that would have been a reduction to home equity in that we dramatically reduced the rate we were building home equity through mortgage payments.

And I know what you are saying about MEW.  If we ever got around to buying another vehicle, it would have been paid for by reducing home equity and drawing on our home equity line of credit.  Certainly when we went from a single car family to a two car family that is how we paid for the second vehicle.  I don't necessarily think all MEW is bad.  We had good equity and the LOC rate never exceeded 6%.  It just meant a year where our debt level remained flat rather than declining.

And on taxes, government is pi$$ poor if it can't manage to balance budgets and either put something aside or pay down debt in "good" times.  Historians will look back on this era as one of the most disgraceful in terms of fiscal management in history.

 

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#12) On June 15, 2008 at 1:12 PM, dwot (42.57) wrote:

EscroogeJr, catch up on your reading, American consumers are already cutting back big time.

You are going to see a realignment where cost of living except housing goes up, and that will squeeze housing back into line with the rest of the costs.  

When the housing economy turns as badly as it has and so many have been burned, it takes a long time to trust again.  I know people that got burned in our 1980 bust and one was about 8 years before re-entering the housing market and other was still out with no desire to re-enter even 14 years later.  The first had a very good job and it took 2-3 years of a lot of "disposible" income to pay for the losses.  The second got burned worse.  A lot of people have been burned very, very badly and some may very well be able to comfortably afford housing in the future but the experience will make them shy from the idea.  People are going to be rethinking, that yes, they may want a home, but not at any price.  And many that aren't hurt will know others that are hurt and will learn from that.

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