patrick.net

Randy,

Seems to me that looking at "average homeowner equity" gives you a very skewed picture, given the "fat tail" problem.

According to this article from the peak of the bubble (August, '05), the average homeowner (at that time) had 56% equity.

http://money.cnn.com/2005/08/04/real_estate/buying_selling/home_equity_falling/index.htm

According to this source, 1/3 of single-unit owner occupied housing is owned outright (as of 2001--but assume no major change in this number):

http://www.census.gov/prod/2005pubs/censr-27.pdf

So if we have a representative sample group of 100 homes, each worth $200K, then the total value of the homes is $20,000,000. The total debt is $8,800,000 (44%) and the equity position is $9,200,000 (56%).

But wait--33.3 of the homes in the sample group are owned outright. So of the $9.2M in total equity, $6.66M is attributable to the homes which are owned outright. That leaves $2.54M in equity to allocate among the remaining 66.7 homeowners. So the average equity position among *these* homeowners is only $38,080, or about 19%.

Accordingly, by my calculations, if the US housing market were to drop by 20%, then the "average" homeowner, excluding homeowners with 100% equity, would be (slightly) underwater. And of course many would be deep underwater. I suspect that a 20% drop in a state like California would be even more devastating.

Can someone please unlock my post? Thanks

Glen,

Excellent detective work --thanks! That average "60% equity" figure sounded unrealistically high to me as well.

"What is the US manufacturing and why do we have such an enormous trade deficeit? I have a very difficult time finding American products to buy. Also, I don’t think we should count the Mariannas Islands as American products, despite the ‘Made in the USA labels.'"

SFWoman, I know your question wasn't addressed to me, but perhaps the answer to your conundrum is that the U.S. manufactures many items that consumers don't come into contact with. And due to human nature, we don't give appropriate weight to that which we don't encounter on a daily basis.

Clothes, toys, and widgets...yes those are overwhelmingly imported, but in the mind of the consumer these items are highly over-weighted relative to their actual value.

In contrast, the U.S. does make lots and lots of: large scale manufacturing equipment (e.g. the stuff inside Intel's plants), airplanes, automobiles, medical devices, large-scale construction equipment, farm equipment, telecommunications devices, "energy extraction" equipment, and on and on. All very high-value stuff. But on an average day, unless you are in one of those fields, you won't notice that the items are American made.

I think another factor is that if you name almost any type of manufacturing, the U.S. does do SOME of it, and maybe a lot of it. I believe we are incredibly diversified in this respect. In contrast, if you pick almost any other country, I think you will find that in some field or another they are completely unrepresented.

Robert,

Amen. Majority of people are stupid and shortsighted.

Glen, RC

I agree completely. Glen's analysis is completely in line with my view. In short, a largely disproportionate amount of "pain" is aimed at the portion (we'll say between 40% and 66%) of financed owner-occupied home owners.

Even amongst those, there is a distribution. Not all of them will go negative on equity. It would be outright devastating to say that even 1/3 of them did. That doomsday scenario sinks about 1/5 of housing. Looking at the (admittedly unimpressive) data I have in reach here on the Great Depression puts it slightly ahead of total foreclosures during the Great Depression.

What I absolutely agree with is the notion that as one slides down the curve towards more mortgage leverage, the amount of consumer debt also increases. The people in this part of the curve are in double jeopardy, while those outside of it are at much less risk even if their homes drop below mortgage value.

What started all this was the suggestion that "China owns a majority of our housing". That is bunk, to be polite.

HARM,

Excellent detective work –thanks! That average “60% equity” figure sounded unrealistically high to me as well.

And 100% of the residents of my household are male if I exclude females.

Glen, good analysis but it isn’t that bad. The 1/3rd of homes owned outright are not going to be the median homes but the median homes of years long past.

RC,

If I understand your comment, you are saying that homeowners with 100% equity are more likely to be the owners of depreciated, dilapidated 100 year old farmhouses and the like, which are worth less than the current crop of median priced homes. I am not convinced that acquisition date really bears much on home value.

I suspect that there are a few characteristics of homeowners with 100% equity: (1) they are wealthier than average, so they have probably maintained their homes in better than average condition; (2) many of them probably inherited older homes which are more likely than average to be centrally located, architecturally significant and/or well-preserved; and (3) some of them are extremely wealthy people who do not want to bother with mortgages, and who buy homes outright which are much more valuable than the median home. If anything, the median 100%-owned home is probably more valuable than the median mortgaged home, if I had to guess.

Glen,

That's really bothers me too. I don't think we should assume a normal distribution for owner's equity and we know that a marketwide price decline will affect people very differently. For people with 50-100% ownership of their house and no intention to move, price decline has no effect. For people with 0-20% ownership of their houses or people who live in unsuitable houses (eg condo dwellers aspiring to SFH, BA people retiring to Bend, OR) will find themselves in a world of pain. And the flippers are dead meat.

We don't need more than 2-5% annual foreclosure rate to cause serious problems to the banking and mortgage system. A couple years of this to squeeze out one end of the fat tail, and suddenly everybody (except maybe retirees with paid off houses and well positioned retirement fund) is in a world of pain.

And, the "fat tail" problem strongly supports the conclusion of ~60% equity value. As Glen just pointed out, there are multiple reasons to believe that value is skewed towards percentage equity ownership.

Another factor not considered is that the longer the holding-period, the greater the amount of land likely to be included in the property. As land per unit has decreased over the past decades, older properties, even if not updated, tend to increase in value disproportionately to the house's physical value.

Glen,

Your suspicions would sync in with the long established suspicion that a depression would make the rich comparatively richer and further eviserate the middle class.

SJ/Santa Clara county inventory back up to a new high after Labor Day (as of 9/10):

Excellent. It got me worried for a while. :)

Randy,

Using ballpark numbers, there are around 70 million "homeowners." Of these, roughly 23 million own 100% of their homes. Let's assume that of the remaining 47 million, 1/3 (as you suggested as a doomsday scenario) could be deep underwater post-crash. This would mean over 15 million homeowners would be deep underwater and would have a strong incentive to walk away from their mortgages. This would cause REOs to skyrocket, inventories to increase massively (againh) and prices to plummet further. At that point, it would be too late for BB to send in the helicopters, because it would take too long for the helicopter money to reach the FBs.

I don't know how it will play out, but I would not be at all surprised to see hedge funds and pension funds implode, long term interest rates spike (even as short term rates come back down), dollar crash, massive unemployment, political upheaval etc., etc... But maybe I am just too pessimistic. I suppose that one saving grace could be the fact that our massive debt load is denominated in our own currency. So maybe we will not experience a meltdown as bad as the '98 Asia crisis or Argentina's recent problems.

Yes, the sun will still rise and normalcy will some day return. But I just have a strong feeling that there will be a lot of pain in the next 5-10 years for average Americans.

According to this source, 1/3 of single-unit owner occupied housing is owned outright (as of 2001–but assume no major change in this number):

http://www.census.gov/prod/2005pubs/censr-27.pdf

Glen, on which one of the 368 pages of this report do you find this stat?

In July, National Mortgage News reported that an unidentified lender took a random sample of 100 stated-income loans, looked at the borrowers' tax returns and discovered that 90 of the borrowers had lied. Thirty exaggerated their incomes by between 5 percent and 49 percent, and 60 borrowers had puffed up their incomes by 50 percent or more. Just 10 told the truth. The lender didn't say how many of these stated-income loans were option ARMs.

http://www.bankrate.com/nltrack/news/mortgages/20060907a2.asp

liar liar pants on fire...

Glen, on which one of the 368 pages of this report do you find this stat?

Page 17--66.7% of single unit homeowner properties were mortgaged in 2001, leaving 33.3% unmortgaged.

Peter P,

I'm sure they weren't all lying on their mortgage applications. Surely some of them were merely lying on their tax returns.

I also find it a bit curious that any tiny, meager, dusty, glimmer of anything other than armageddon gloom gets many people around here upset. Sometimes I think many in this community won’t be happy until the world is burning. Hyperinflation. Depression. US Peso. Bury gold in your yard. Learn to grow your own beets. Chinese own everything. No US manufacturing left. All your jobs are belong to India.

Heh, now, we're not called "gloom n' doomers" for nothing! And didn't Face Reality bestow the title of "Darth Bubblehead" on Peter P? :twisted:

Personally, I'm certainly not counting on economic armageddon, but I do think the U.S. economy has serious fundamental structural problems --overreliance on foreign debt-fueled consumption to "drive" the economy being a big one. While it's reasonable to see fears of China/India taking over as overblown, I don't think you can just write them off as powerless "paper tigers" either.

China especially is rapidly building up its infrastructure, has already largely developed beyond strictly third-world status ("second world" now?) and may well join the ranks of industrialized first-world nations within a generation. India --while it has much further to go on infrastructure & living standards-- is producing top-rate engineers & SW developers as rapidly as we produce more tort lawyers.

Surely some of them were merely lying on their tax returns.

I see. You are right. :)

Thanks, Glen.

Something tells me Randy would hate this site:

http://www.economyincrisis.org/?content=eicad1

Robert Cote Says:

We’ve test the limits of consumer credit to the point of destruction. Turns out that you can’t give people as much money as they want. Turns out you can’t let people asset speculate with all borrowed money. Turns out you can’t trust people to self-qualify for generous loans terms. Shocked, shocked I tell you to discover gambling going on.

But hasn't the Fed already interfered going the other direction when they slashed rates after 9/11 to "pump up the economy" and temper the dot-bomb crash?

BTW, nice work on the Casablanca reference.

Page 17–66.7% of single unit homeowner properties were mortgaged in 2001, leaving 33.3% unmortgaged.

That is a count of the number of households mortgaged. I have no issue with that figure. What I was referring to was the value of owned equity, which is more relevant to the nuclear meltdown scenarios.

Hedge funds are just the more speculative (and therefore risky) aspect of a much larger phenomenon: the emergence of a shadow market system. Private Equity, which is much larger a group than just hedge funds, has grown in direct proportion to the onset of capital market regulations. This is basic American capitalism at work before our very eyes. The rules of the "public" market become burdensome, and increasingly smart money exits that market in search of more friendly returns. Enter PE. Has anyone noticed the explosion of LBOs and publics going private?

I'm sure this is both bad and good. It is good if it allocates capital more efficiently than a more heavily regulated public market can. It is good in that it has barriers to participation keeping "ma and pa" and daytraders out of these markets (qualified investor rules). It is bad if it is too loosely regulated and ends up causing mayhem in its own right (LTCM type disruptions).

That's the real risk. We may all suffer collateral damage from hedge fund implosions; probably in the form of bank bailouts. But, the direct damage goes to mainly rich people -- although we are seeing pension funds allocate tiny but increasing amounts into HFs; more into PE funds.

Even this issue ain't so clear as to how it will unravel, if at all.

And I forget the most likely outcome of all the PE/HF/VC money: more regulation. Simply, the SEC could just declare jurisdiction over these markets and start regulating them. This is the most likely outcome, in my opinion.

The 100% homes are not going to be dilapidated or run down. They are only going to be more modest. The median home of 1975 was some 600 sq ft smaller than in 2005 for example. Then there’s the demographics factor. How many million people sold out their BosWash suburban dwelling to move into a Florida trailer park for cash?

RC,

It is hard to try to guess at the relative values of 100% owned homes vs. mortgaged homes. I do not have any data on this, so I am just guessing.

Not to pick nits, but the data source I cited omits mobile homes. But your point is taken that there probably are a significant number of "trade down" retirees.

Although square footage of new homes was smaller in 1975 vs. 2005, I think you are ignoring a couple of factors which make older housing more valuable: (1) A lot of people have "added on" to those smaller, older homes; (2) Many of the older, run-down houses have been torn down, which means the surviving older homes are probably bigger and nicer than the average new home built in 1975 (don't forget all of the beautiful 100+ year old craftsmans, colonials, spanish-style homes, etc., etc.) --this is survivorship bias at work--the nicest homes survive and the cramped, ugly older houses get torn down; and (3) older homes tend to be on larger lots (as Randy points out) and closer to city centers and desirable attractions.

In any case, I would happily take a 1200 sq. foot spanish style home in the Hollywood hills built in 1925 over a 3000 sq. foot mcmansion in Vegas built in 2005.

And I forget the most likely outcome of all the PE/HF/VC money: more regulation. Simply, the SEC could just declare jurisdiction over these markets and start regulating them. This is the most likely outcome, in my opinion.

Money will just go offshore if they are regulated.

May 7, 1997 - October 6, 2005 RIP.

RC,

I figure the May 7, 1997 date refers to the passage of H.R. 2014: 'Taxpayer Relief Act of 1997' that upped the cap gains exemptions to $250K/500K, but what happened on Oct. 6th, 2005?

Glen, Randy H,

It wasn't my intent to get Monday started off on the wrong foot. It's just that it seems many have raised a few serious exceptions when attempting to throw "the number" around.

I can speak from personal experience after having been in the same home (and making mort. payments) for 10 years. When we went to pay off the 1st at closing the balance had only gone down a few grand. I am serious. Had it not been for one crazy stretch I would have basically been at B/E.

My guess is in the future more home "equity" will be generated from software programs that accelerate the repayment of the mortgage than from market appreciation. Be it in a "bi-weekly" installment or other program to maximize the borrowers resources like using the cash value in a whole life policy or other "hidden asset" to kick start the process. I'm guessing if you can pay your home of in say 7 to 10 years your actual int. rate will be about 2%.

Yes, wether or not you over paid for your house!

RC,

Thanks for the data, I will concede the point.

So I guess this means that I overstated my case-- the average homedebtor is actually not as bad off as I thought. Still, though, I think a 5-10% national correction in housing prices would be enough to turn an awful lot of mortgages upside down.

I think I am just going to try to save up enough cash (around $90K) to buy one of these mobile homes and plunk it down somewhere in the boonies, so I won't ever have to worry about carrying a mortgage:

http://www.claytonhomes.com/index.cfm?include=showcase/west/golden_west_perris/GO621FT/exterior.cfm

Lot size is one of my trigger topics in my war with the planners.

Can you clarify?

Might as well throw the last bit of fuel on the fire. It is not true that most wealthy homes (multi-million dollar homes) are owned outright, at least by the owner occupiers so as to show up in these types of statistics.

First, most wealthy people use wealth-managers who optimize their capital portfolio. They will usually use quite a bit of callable debt, secured against liquid capital invested in PE/HF, especially for the past many years with ultra low interest rates. So no, a financed ubermansion is not financed with a mortgage. But it is not "100%" equity owned by the occupier either. It simply could be if the math made it worth while.

Secondly, even when properties are owned outright, and quite a few are, they aren't owned by the actual Mister Richguy. They are owned by this or that trust/corp/LLP/partnership, etc. assumedly for tax and estate transfer reasons. So these won't show up in the owneroccupier stats either.

SP,

What happens to the US manufacturing figure if:
1. you exclude ‘defense’ related manufacturing
2. you factor out the value of imported components from the value of US manufactured products

First off, I don't know precisely but would be interested in the answer myself.

Intuitively, it would be pretty hard to filter out for defense-related spending due to its deep integration in our economy. For example, the DoD buys lots of tires. But the more tires they buy, the cheaper they are for everyone due to scale. So, what is the effect if you take out defense purchases? Maybe not as simple as subtracting out the unit value.

As to the transnational assembly problem, there are legitimate debates about how to account for this properly at a detailed level. Overall, however, the macro accounting works out pretty well because of the way that capital flows and trade flows are counted. In other words, if the US counts export of a $50K car, which is 80% mfg outside the US, then that 80% will show up as capital flowing out. Capital & trade are part of the same equation.

The main thing I think that escapes a lot of people, and prompts honest questioning like SFWoman started with, is that the US' base is HUGE. Enormous. Gargantuan. Post WWII US manufacturing effectively took over the entire planet. The US was the only mfg base left undamaged after the war, and was by far the most efficient. That will take quite a few more decades or longer to unravel.

I remember during the peak of the Boeing v Airbus debacle the Economist ran an interesting little bit about how the "value" of components in an Airbus aircraft actually contained more US sourced product than a Boeing did (because of Boeing's Canadian production).

Robert, I like somewhat higher density because I prefer steel-reinforced concrete.

Robert Cote',

You know, it's just criminal. That exact same scenario playing out with banks and their long time clients made me think there has to be a better way!

I've done a little research and there is one legit firm I found that offers to take your total debt and manage it for you. They simply set up a "reserve account" and pay off the things that would be the most impactful. They would say for instance chip away at your store cards, get them paid off and move on to say auto loans and ultimately the house. I've integrated it into my presentation for wealthier clients. As I'm sure you have surmised the impact is two fold in that not only are debts reckoned with more quickly the money that would have gone into filling "the black hole" can now be adjudicated toward savings.

Oh, the "reserve account" is so they can make payments early reducing the amount of int. the client would have to pay. This also translates into lower DTI and ultimately higher FICO scores. It's sad, so many of us have been debt slaves for so long someone comes along and shows us a better way and it just seems far fetched to us?

And for 9/11 the networks should have the entire 9/11 attacks, the cell calls, and the 911 calls playing 24 hours straight on a loop. Helps the folks stay focused.

On the fact that the terrorists won and that we should live in state of terror?

You know what! We should have 2 minutes of hate per day where they show Ossama on TV and we could all boo him.

There are some more great ideas here: http://en.wikipedia.org/wiki/Nineteen_Eighty-Four

I used to work somewhat near the World Trade Center (actually on Wall St) and this kind of thinking cracks me up: all of the chicken littles (let's tap the phone lines! let's search everyone going into the subways!) are outside of NYC - in the South, in the Midwest, etc.

People in NYC have the right focus and the right priorities: making money and living life.

Terrorists be damned.

FWIW: 42,000 people die a year (14 September 11ths) on our highways.

Since September 11th, 2001 - 210,000 people died on our highways.

Forget the terrorists - we're our own.

Think about even the myth of oil for blood. Without a strong military would our economy be more or lass at the mercy of foriegn interests? Yep, when you look at it that way the minor cost of the military generates great savings in the cost of energy.

There's sort of an infinite loop problem there...

And the alternative is? The carnage on our highways are indeed regretable but they are small and getting smaller every year.

The alternative? I propose aggressively enforcement of traffic laws and speed limits.

The speed limits on many roads are too high and they should be lowered. Also we should have the same speed limit for trucks and auto.

I propose a national 60mph speed limit.

Nope. Sorry. Speed doesn’t kill. Lack of skill kills but we don’t tighten drivers tests.

Lack of skill will not go away. Lowering speed can at least minimize damage.

All other factors being equal, reducing speed can reduce fatality.

60mph is a lot of speed.