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fishweewee

Own a Home? Let's Talk Homeowners Equity

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Interesting statistic that is tracked by the Federal Reserve in its flow of funds report.

 

www.federalreserve.gov/releases/z1/current/z1r-5.pdf

 

At the end of 2007, owners equity in household real estate was about $10.3 trillion (vs. $10.5 trillion in mortgage debt), or 49.4% of value. Put another way, loan to value at 12/31/07 was about 50.6%.

 

Fast forward to year-end 2011. Owners equity in household real estate was $6.1 trillion, down 41% from year-end 2007 (all-time low post crash). Mortgage debt was $9.8 trillion at year-end 2007. Loan to value rose to 61.6%.

 

So, a few things jump out at me that seem obvious.

 

1) Homeowners equity has dropped 41% over 2007-2011 and continues to do so. How can the housing market be improving if this keeps up?

 

2) Over the same time, residential mortgage debt has only dropped only 6.6%.

 

3) This explains why it has been difficult for many folks to re-fi - they just don't have the equity, and it continues to slide. And lending standards have tightened on top of that.

 

4) The period 2001-2007 marked a great ramp up in borrowing and spending on credit cards and home equity loans, etc. I'm looking at the consumer credit line on line 34 on Table B.100 ($2.6 trillion at year-end 2007 vs. $2.5 trillion at year-end 2011). There is hardly a dent in this number in spite of the fact that personal disposable income in nominal terms is up over the time period - which tells me that the rise in the cost of living (oil, food, etc) is hurting consumers. That tells me that the deleveraging process (paying down debt) is happening at a glacial pace - which means a continued slow slow for consumer spending in the near future.

 

I don't think any of this should be a surprise to anyone. It's certainly not the basis for optimism, in my opinion.

 

By the way, the steadily declining homeowners equity number is another sign the economy continues to slow.

 

Flow of Funds attachment here: (.pdf file)

 

[ATTACHMENT=4953]z1r-5-1.pdf (29k. pdf file)[/ATTACHMENT]

 

 

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Probably true for most areas. Some places have seen equity restored to pre bust levels. Sold my house six months ago in 16 hours for well over asking and more than I paid for it five years ago. Equity around here has been restored. Those who never took out home equity during the fake gold rush are much better off then those who tapped into and spent the fake money. I know a few people who are effed because they kept taking out equity every refi.

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ugly numbers, yes, but homeowner equity is a vaporous concept, like stock value.

 

When you hear discussions of the stock market they always talk about stock crashes as investor equity being destroyed... as if it is cash.

 

If I buy 100 shares of Foo Inc. at $20 a share I have spent (for real) $2000 of my cash. If the price goes up to $50 a share, I do NOT have $5000.

All I really have is 100 shares of a company. If the price falls back to $30 I have NOT lost $2000. If I sell then I have $3000 cash and have made $1000. I have not lost $2000.

 

The only way I get $5000 is if I SELL the shares when the price is $50 per. And even then I have to hope my selling does not drop the price (which can happen for large sales on companies with low float.).

 

The press talks about stock as if it is cash. It is not. Stock is shares. Cash comes only at sale. If the price per share falls I have not lost cash until my sale would gen cash less than what I invested. Owning the shares is a risk.

 

 

Same for houses. If I buy a house for $100,000 and the market causes prices to rise, and let's say IF I WERE TO SELL my house would bring $150,000, then I have not made $50,000.

I only get cash when I sell. Equity is just a statement of overall market condition and state, it is not something I can count on as an asset.

 

As we have seen, equity is hare today, goon tomorrow.

 

Equity is not cash and should not be treated as an asset.

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hamlet, with financial assets down in the same period, line 8 , and the consumer credit number number almost unchanged in the same period it shows us deleveraging is a slow long process. As an ex govy broker , check that line 9 - 19 . app 2 tril in 07 totals, 2.3 tril in 11, almost looks good . Remember the same period the fed floated 4 to 6 tril into the system , or more ?

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Its not hard to see why MS is bearish.

 

Yep. Macros are tough at best. However, I think we're in this range until rates go up forcing down home prices and DESTROYING the bond funds that litter 401k's. That's going to be a real killer for the folks thinking their investments are conservative while facing a near term retirement.

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Back a long time ago dude , some papers were written how low rates hurt the economy. They stressed people spent the interest only and decling rates muted spending. That was when 1 tril in debt was in the markets not 15 tril. I really dont see how rates can go up either, if the mess started with housing , increasing rates aint going to help it. Yet ignoring this debt is dicey at best, stupid to say the least,and regardless of being a dem or rep its a killer in the long run.

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All of the worry about housing debt and recovery just mask the real issue that will destroy the US economy. When you are continuing to run a trade deficit of over 600 billion a year or more, going year after year you really have no means of recovery. This will lead to no one wanting our bonds soon enough, and then everything will be a total mess. You think inflation is bad, wait for deflation. The housing markets in the hardest hit areas are just the tip of what deflation will mean.

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