Comments on: Chart of the day: Household equity

By: Zach

Zach — Fri, 12 Jun 2009 14:11:17 +0000

Quercus and Ponter:

I agree with your point, although I disagree with your choice of words. The wealth was very real. Just ask people who sold in 2006 and 2007. The problem is that the gains weren’t realized. The lesson is to remember to make a distinction between realized gains and unrealized gains. Decisions were being made as if someone already had chickens when all they really had was eggs.

By: Quercus

Quercus — Thu, 11 Jun 2009 21:26:17 +0000

Ponter Boddit — I completely agree with you that the debt is real, even if the collateral’s high value is now imaginary.

My point is that the problem was too many homeowners and banks treating the imaginary ‘wealth’ of an asset bubble as real (and therefore making the decision to trade the imaginary wealth for very real debt).
If this blog wants to educate people, it should make it clear that the ‘wealth’ was indeed imaginary, and that the problem isn’t the bubble deflating, it’s that we had a bubble to begin with.

By: Ponter Boddit

Ponter Boddit — Thu, 11 Jun 2009 19:19:56 +0000

Quercus: Yes, all that “wealth” was inaginary, but the unecessary debt incurred as a consequence of continually refinancing in order to get those granite counter tops and media centers (and trips to Cancun, etc.) was not. Neither is the no-longer sustainable (because of job loss or whatever) grandious mortgage that many people are now saddled with as they traded-up based on that imaginary wealth. As in any game of musical chairs, somebody is left sitting on air.

If those with homes whose “value” is now assessed at less than the selling price can still afford the mortgage, and if they still love their over-priced dream homes, then I agree: Lesson learned (maybe), but these people are hardly poor. But there are some folks who got caught up in this who really got slammed, and are now poor indeed. Consider that a recent study showed some 60% of foreclosures these days are a result of medical catastrophes. So in addition to all the others we are blaming, how about a bit of blame for the health insurance industry, who have, in addition to all the other harm they’ve done the American people, made a bad housing situation worse. Funny how it’s all connected.

By: frances snoot

frances snoot — Wed, 10 Jun 2009 16:30:55 +0000

oops: meant to say rising Treasury bond yields feed the implosion…also the new that Russia may swap Treasuries for IMF bonds…

By: Bruce Krasting

Bruce Krasting — Wed, 10 Jun 2009 12:53:11 +0000

Nice piece.

Looking at the graph it would appear that the 60% of GDP has held pretty well for the last 60 years. A reversion to that level would be very beneficial. The line that represents the 07-09 correction is far too steep. We have to revert to the mean before we can really correct values. That will take another five years.

By: frances snoot

frances snoot — Wed, 10 Jun 2009 12:39:36 +0000

Mr. Salmon is comparing home equity to GDP, which is an interesting take seeing that consumption became 70% of GDP. The home atm card syndrome that accompanied the bubble has not been sufficiently emphasized. In Florida, the bubble pop has had disasterous effects on consumer spending as well as tax receipts. To make up for the falling home equity, the politicians have decided to raise taxes on houses that are worth less everyday.

If home equity has become inherently tied to GDP, then the bubble pop hurts more than just property owners, mortgage brokers, and politicians depended on property tax. Falling Treasury bond yields feed into this implosion.

By: Quercus

Quercus — Tue, 09 Jun 2009 19:32:36 +0000

I tend to agree that it’s kind of ridiculous to say “homeowners are now poorer”. No natural disaster has destroyed their houses or even made them less usable or otherwise decreased the value of their houses. Just because the supply of greater fools suddenly dried up and unsustainable bubble prices have dropped, that doesn’t mean that as a society we have lost the wealth of homes that can be lived in.
Putting things the way this post does makes it sound like the bubble was a good thing (we’re all richer!!) and the only problem was the pop. Which I think you and I know isn’t the case, but still way too many people do think this way. If you have to say something about decreasing equity, at least put “poorer” in quotation marks or something to make it clear that it was just imaginary wealth.
[Yes, prices are the best way we have to generally estimate value, but that doesn't mean prices are always an infallible indentifier of exact value]

By: Zach

Zach — Tue, 09 Jun 2009 14:46:28 +0000

Felix,

Doesn’t this post contain the same bit of “woolly thinking” that you criticized in a May 25 blog post about comparing the current value of one’s 401(k) account to some previous peak? I think the same criticism applies here. Just as we ought to view 401(k)s as long-term investments, and thus ignore or (at least) accept short-term fluctuations, housing ought to be seen as a durable good that provides a stream of housing consumption, not an investment good that provides financial returns.

Also, I’m confused about your point regarding non-housing consumption fueled by housing equity withdrawals. If that was indeed the case, which I thought it was, then why does the graph show equity increasing through that time? Perhaps it is still true, just that rising home prices dominated the equity withdrawals. If so, then the equity withdrawals don’t seem to be such a bad idea if one considers with permanent income hypothesis. Of course, it turns out that rising home values do not equate to rising permanent income.