Paulson's Double Whammy
Barry Ritholtz notes"Earlier this week, Treasury Secretary Hank Paulson had some interesting comments on the Housing Market reversal. He said he hoped declines in housing prices had been largely offset for Americans by higher stock prices...
This is a bit of wishful thinking on Paulson's part (perhaps cheerleading is part of the job description of his Office). When we look at the most recent studies, we learn stocks gains do not remotely come close to impacting the average family the way Home price do."
Dr. David Altig at Macroblog offers a series of missives which beg the question of whether the housing market amongst other things is currently bottoming out: Bottoming Out?, Part II, Part III, and Part IV.
We tie these two notions together in tonights offering for your acceptance... anecdotal evidence from neighbors, people on the street and more than one of your average licensed financial investment counselors...
Submitted for your approval... the average homeowner in a bubble area whose home has appreciated 200% to 400% in the last 2 - 5 years and decides to stay put and not sell...
Said homeowner decides to tap that equity for investment purposes. Say this guy's house "over" appraised (which is most common these days) on a refi at $700K...
Now we take out a conservative 70% loan to value ratio on $700K, that gives around $500K cash for chaos...
Possible destinations for this cash are the real estate market, stocks, bonds, a kitchen bath remodel, juniors education, and perhaps a toy (car, boat, etc.) for Daddy or Momma.
Lets say our guy is wary of the real estate bubble (and well he should be), so after cooking $100K into the economy, at least $400K gets planted in the stock and bond market...
Things are going good the last couple years, so our boy is makin money and his financial advisor makes it regardless of market direction.
First hiccup.... this year the $700K house is suddenly worth what someone will pay for it, (much like what a $100 bill is really worth) which there would be no takers even at $500K.
Next year, it gets worse and he can't get $400K if he tried, but our guy doesn't care, he unlike others was wary of the bubble to start with and he is where he wants to be and already has his cash in hand.
That home equity which was artifically created out of thin air, has gone the way of smoke and mirrors through the housing sector decline, and the leveraged cash extracted from it was used to prop up the equity markets.
Second hiccup: What happens when the equity markets correct and a chunk of that home equity disappears? Commodities already have and stocks are due.
Remember Paulson "hoped declines in housing prices had been largely offset for Americans by higher stock prices."
Unlike the Fed and Treasury, Mr. Homeowner has nowhere to run or hide. The "nest egg" home is now worth less than the extracted equity which has been depleted to a large extent, and the loan payments must be maintained.
In the event of a non or under performing stock market, Paulson's hope may became a double whammy as many "equity" investors may be forced to liquidate their stock positions to go into the safety of the bond market and or service their debt.
Consider that 40% of last years record real estate sales were second homes, and in some bubble areas, 80% of the purchase & refi loans made in the last two years are ARMS.
And lets not mention what might happen to speculators who plowed the extracted equity into the real estate market and get caught holding the bag nobody wants or can afford.
A declining housing sector confluence with the emasculated automotive industry is just starting to be felt. Sprinkle in the inverted yield curves effect on financial institutions and the reaction could be toxic.
The equities markets are hanging in for the moment, but if commodities and energy are any indication of what is to come...
Maybe some of the "economist" bloggers out there can get their teeth into this one:
Considering that the bulk of stock market increases may have been driven by extracted housing equity.... What will the economic effects be if the housing and equities markets take a simultaneous beating?
At any rate, we believe that this is just the tip of the iceberg for real estate and in a slow and painful process "bottoming out" may not occur until late 2008-2009.
This is a bit of wishful thinking on Paulson's part (perhaps cheerleading is part of the job description of his Office). When we look at the most recent studies, we learn stocks gains do not remotely come close to impacting the average family the way Home price do."
Dr. David Altig at Macroblog offers a series of missives which beg the question of whether the housing market amongst other things is currently bottoming out: Bottoming Out?, Part II, Part III, and Part IV.
We tie these two notions together in tonights offering for your acceptance... anecdotal evidence from neighbors, people on the street and more than one of your average licensed financial investment counselors...
Submitted for your approval... the average homeowner in a bubble area whose home has appreciated 200% to 400% in the last 2 - 5 years and decides to stay put and not sell...
Said homeowner decides to tap that equity for investment purposes. Say this guy's house "over" appraised (which is most common these days) on a refi at $700K...
Now we take out a conservative 70% loan to value ratio on $700K, that gives around $500K cash for chaos...
Possible destinations for this cash are the real estate market, stocks, bonds, a kitchen bath remodel, juniors education, and perhaps a toy (car, boat, etc.) for Daddy or Momma.
Lets say our guy is wary of the real estate bubble (and well he should be), so after cooking $100K into the economy, at least $400K gets planted in the stock and bond market...
Things are going good the last couple years, so our boy is makin money and his financial advisor makes it regardless of market direction.
First hiccup.... this year the $700K house is suddenly worth what someone will pay for it, (much like what a $100 bill is really worth) which there would be no takers even at $500K.
Next year, it gets worse and he can't get $400K if he tried, but our guy doesn't care, he unlike others was wary of the bubble to start with and he is where he wants to be and already has his cash in hand.
That home equity which was artifically created out of thin air, has gone the way of smoke and mirrors through the housing sector decline, and the leveraged cash extracted from it was used to prop up the equity markets.
Second hiccup: What happens when the equity markets correct and a chunk of that home equity disappears? Commodities already have and stocks are due.
Remember Paulson "hoped declines in housing prices had been largely offset for Americans by higher stock prices."
Unlike the Fed and Treasury, Mr. Homeowner has nowhere to run or hide. The "nest egg" home is now worth less than the extracted equity which has been depleted to a large extent, and the loan payments must be maintained.
In the event of a non or under performing stock market, Paulson's hope may became a double whammy as many "equity" investors may be forced to liquidate their stock positions to go into the safety of the bond market and or service their debt.
Consider that 40% of last years record real estate sales were second homes, and in some bubble areas, 80% of the purchase & refi loans made in the last two years are ARMS.
And lets not mention what might happen to speculators who plowed the extracted equity into the real estate market and get caught holding the bag nobody wants or can afford.
A declining housing sector confluence with the emasculated automotive industry is just starting to be felt. Sprinkle in the inverted yield curves effect on financial institutions and the reaction could be toxic.
The equities markets are hanging in for the moment, but if commodities and energy are any indication of what is to come...
Maybe some of the "economist" bloggers out there can get their teeth into this one:
Considering that the bulk of stock market increases may have been driven by extracted housing equity.... What will the economic effects be if the housing and equities markets take a simultaneous beating?
At any rate, we believe that this is just the tip of the iceberg for real estate and in a slow and painful process "bottoming out" may not occur until late 2008-2009.
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