Here's the Headline on Yahoo today:
Homeowner Equity Is Lowest Since 1945
Thursday March 6, 2:15 pm ET By J.W. Elphinstone, AP Business Writer
Federal Reserve Report Shows Homeowner Equity Dipping Below 50 Percent, the Lowest on Record
How is this possible? Haven't we just experienced the greatest decade ever
for housing appreciation? Didn't the average price of a home in the United
States double during this time?
But wait, the news is actually worse than what's reported. Right now the value of housing in America is about $20 trillion. There is a total of about $10 trillion in mortgage debt held against this equity.
Everything looks pretty good so far, right?
However, about 30% of the housing stock is owned outright ($6
trillion). So that leaves only $14 trillion in housing equity against $10 trillion in debt - all of a sudden that cushion doesn't look as big as
it did.
In the past year, the Case-Shiller Home Price Index has said that
housing values across the country have plunged by almost 10%! Take away 10% from $14 trillion and you're down to $12.6 trillion in equity. Uh oh, all it's going to take is another 20% drop to WIPE OUT ALL OF THE HOME EQUITY IN 70% OF THE HOUSES IN THIS COUNTRY!
This, my friends, is a classic pump and dump of the housing
market. If you understand economics you will know that all pricing
power happens at the margins. Housing is a product that has very small margins. At any given time, only about 1%-2% of the existing housing stock is for sale (there is about 100 million housing units in this country).
Because of easy financing (no down payment, no documentation, liar loans, option ARMs, etc., etc.) you had a large number of people enter the housing market. Anyone knows that when you increase demand without a corresponding increase of supply (housing supply takes about 2-3 years to catch up) the price goes up. In this case, the price went up substantially.
for housing appreciation? Didn't the average price of a home in the United
States double during this time?
But wait, the news is actually worse than what's reported. Right now the value of housing in America is about $20 trillion. There is a total of about $10 trillion in mortgage debt held against this equity.
Everything looks pretty good so far, right?
However, about 30% of the housing stock is owned outright ($6
trillion). So that leaves only $14 trillion in housing equity against $10 trillion in debt - all of a sudden that cushion doesn't look as big as
it did.
In the past year, the Case-Shiller Home Price Index has said that
housing values across the country have plunged by almost 10%! Take away 10% from $14 trillion and you're down to $12.6 trillion in equity. Uh oh, all it's going to take is another 20% drop to WIPE OUT ALL OF THE HOME EQUITY IN 70% OF THE HOUSES IN THIS COUNTRY!
This, my friends, is a classic pump and dump of the housing
market. If you understand economics you will know that all pricing
power happens at the margins. Housing is a product that has very small margins. At any given time, only about 1%-2% of the existing housing stock is for sale (there is about 100 million housing units in this country).
Because of easy financing (no down payment, no documentation, liar loans, option ARMs, etc., etc.) you had a large number of people enter the housing market. Anyone knows that when you increase demand without a corresponding increase of supply (housing supply takes about 2-3 years to catch up) the price goes up. In this case, the price went up substantially.
Now we have about 4% of the homes in America for sale and you would think it was the end of the world! However, at the margin prices need to come down substantially in order to clear out this excess inventory. The fact that sales are also slowing substantially is another problem because it puts even more pressure on prices to come down.
So where are house prices going? To answer this question I want to take you back to the last bubble, the tech bubble. From 1996 to 2000 the Nasdaq went from 1052 to 5048. Then the bubble burst and the Nasdaq fell all the way to 1142 in October of 2002.
ALL OF THE GAINS OF THE BUBBLE WERE WASHED AWAY ONCE IT POPPED!
Even today, 8 years after the Nasdaq reached that lofty high, the
Nasdaq closed at 2220. That's almost 60% off it's all time high. If you add in inflation (3%/year), the Nasdaq is still down OVER 80%.
In my opinion, the same thing is going to happen to the housing
market. ALL OF THE GAINS IN THE PAST 10 YEARS WILL BE LOST! That means the average price of a home in America is going back to around $100,000. Also, because the housing market is not nearly as liquid as the stock market, it will take longer to deflate than the Nasdaq did. The peak of the housing market was in the fall of 2005, so we're 2.5 years in right now and prices are only down 10% (and all of that loss occured in 2007).
Equity is a phantom, but Debt is permanent!
In the end we'll have $10 trillion in housing stock backed by $10
trillion in debt. That means Americans will have, on average, NO EQUITY in their homes when this is all done!
That means the end result is that we, as a nation, have become poorer due
to the housing bubble. Not to mention we now have to live through the massive housing led recession that we are entering right now.
We've been played, America! We were the Mark and we fell for it, and now we have to suffer the consequences. The scam artists are laughing all the way to the bank!
ALL OF THE GAINS OF THE BUBBLE WERE WASHED AWAY ONCE IT POPPED!
Even today, 8 years after the Nasdaq reached that lofty high, the
Nasdaq closed at 2220. That's almost 60% off it's all time high. If you add in inflation (3%/year), the Nasdaq is still down OVER 80%.
In my opinion, the same thing is going to happen to the housing
market. ALL OF THE GAINS IN THE PAST 10 YEARS WILL BE LOST! That means the average price of a home in America is going back to around $100,000. Also, because the housing market is not nearly as liquid as the stock market, it will take longer to deflate than the Nasdaq did. The peak of the housing market was in the fall of 2005, so we're 2.5 years in right now and prices are only down 10% (and all of that loss occured in 2007).
Equity is a phantom, but Debt is permanent!
In the end we'll have $10 trillion in housing stock backed by $10
trillion in debt. That means Americans will have, on average, NO EQUITY in their homes when this is all done!
That means the end result is that we, as a nation, have become poorer due
to the housing bubble. Not to mention we now have to live through the massive housing led recession that we are entering right now.
We've been played, America! We were the Mark and we fell for it, and now we have to suffer the consequences. The scam artists are laughing all the way to the bank!
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