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Guest Post: $6.5 Trillion Lost, One House At A Time
Submitted by Charles Hugh Smith from Of Two Minds
$6.5 Trillion Lost, One House At A Time
The $6.5 trillion lost in the bursting of the housing bubble is not a "paper loss," it is tragically real.
Is anyone surprised that housing continues to slide? According to this report, Home Market Takes a Tumble: Turnaround More Distant After 3% Drop, Steepest Quarterly Decline Since 2008, housing has declined in value for 57 straight months, almost 5 years.
Since the housing bubble topped in most areas in 2006, and it's now 2011, that makes sense: 2006 + 5 = 2011.
American homeowners have lost $6.5 trillion in equity in those 57 months. Here is the data from the Fed Flow of Funds household balance sheet:
Homeowner's equity:
2006: $12.8 trillion
2011: $6.3 trillion
Net decline: $6.5 trillion
That is a big number, and the analysis I presented in The Housing Bubble Broke the Middle Class (April 27, 2011) suggested that this $6.5 trillion was roughly half of the middle class's total net assets.
It's difficult to grasp such large numbers, so let's look at some actual houses. The sales price of houses is public record, and more or less at random, here is a selection of recent home sales here in Northern California. I purposefully selected sales from a spectrum of neighborhoods ranging from working-class to very desirable, exclusive suburbs (the price will telegraph the property's desirability).
The key point here is that these catastrophic losses are taken by someone: either the homeowner, the lender, or the taxpayer. The gains were paper, but the losses are real. That is the ongoing tragedy of the housing bubble.
1. Recent sale: $820,000
Last sold 2007: $1.172 million
Nominal loss: $355,000
(does not include transaction costs or losses due to inflation)
Even if owner put down 30%, their equity was wiped out.
2. Recent sale: $110,000
Last sold 2005: $370,000
Nominal loss: $260,000
3. Recent sale: $160,000
Last sold 2004: $455,000
Nominal loss: $295,000
4 Recent sale: $175,000
Last sold 1999: $205,000
Nominal loss: $30,000
Nationally, prices have round-tripped to 2003, but that masks the reality that in many locales, prices have returned to 1998 or even lower.
This is a home in a very desirable suburb:
5. Recent sale: $650,000
Last sold 2005: $1.25 million
Nominal loss: $600,000
If you add up the losses from just these four homes purchased in the bubble era, the loss exceeds $1.5 million. That is a staggering loss from only four homes. Now multiple that by hundreds of thousands of homes.
Here are two homes in less desirable ("rough") neighborhoods:
6. Recent sale: $85,000
Last sold 2004: $295,000
Nominal loss: $210,000
7. Recent sale: $135,000
Last sold 2005: $419,000
Nominal loss: $284,000
Sadly, the subprime mortgage fraud enabled the "dream" of effortless profits from owning and churning real estate to filter down to even marginal areas. The bubble put real estate out of reach of qualified moderate-income buyers, and yet it was touted as a wonderful "innovation." It was certainly wonderful for Wall Street and those who originated the embezzlement-special mortgages, but less so for the taxpayers who were handed the bill to save the "too big to fail" banks and investment banks.
8. Recent sale: $255,000
Last sold 1996: $189,500
Nominal gain: $65,500
This is interesting because it offers an example of the pernicious effects of even "low" inflation. As we are constantly reminded, the U.S. has been in a "low inflation" environment for decades. This is of course a key part of the propaganda campaign to mask the severe erosion in wages' purchasing power.
On the face of it, the home seller pocketed a hefty profit of $65,500. But let's factor in commission and inflation. The transaction costs (commission, closing, transfer fees, etc.) are typically around 7%, so the actual net capital gains would be around $47,500, not $65,500.
According to the BLS inflation calculator, which likely underestimates "real" inflation, it now takes $270,000 to buy what $190,000 bought in 1996.
So the owner actually lost purchasing power in owning this house for 15 years. Minus commission and closing costs, the proceeds were around $237,000, which is about $33,000 less than the inflation-adjusted break-even point of $270,000.
Yes, there is the mortgage deduction and tax breaks to factor in, but considered strictly as an investment, the nominal and real gains in real estate still matter.
Put another way: a house purchased in 1996 for $100,000 has to be worth $142,000 today just to keep up with inflation. Factoring in transactions costs, then the house would have to be sold for roughly $152,000 for the owner to extract $142,000--the sum needed to simply maintain purchasing power.
In other words, a house that rose 50% over the past 15 years has simply kept pace with inflation. The nominal "gain" is utterly illusory.
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Hilarious how the worse the news is, the higher the markets go.
Classic corruption and manipulation.
Why fight Uncle Gorilla???
Sooner or later, Joe Blow Investor will be left holding the bag, just like in '08, both ways (bailout$ and panic $elling).
Gen X tapped out, Gen Y has doodely squat, Boomers scrambling to keep their oft-broken nest eggs from dribbling through their fingers. The only person, my age, I know that's bought a house in the last 3 years is independently wealthy, married into a 9-figure fortune. Student loans--- eating the future, tapping out the homeowners of tomorrow.
You speak the truth. Too bad those in power have no answers to our problems. Can't even tell us the truth. On the other hand - How many can handle the truth?
"In a time of universal deceit, telling the truth is a revolutionary act."
-Orwell
The housing run up was nothing more than hyperinflation. So glad it is "crashing" back to earth.
It was a manipulated bubble to feed banks, every increasing NINJA loan nonsense, a total fraud and no one ever got arrested for the biggest crime in history! Only now we got a bigger bubble blown, this time in paper- stocks, bonds, REIT's...and it will blow soon taking everything down wtih it this time.
Yes, and look how many suckers purchased the propaganda.
Yes it deserves to crash. It had to crash. But thanks to the Fed offloading all the MBS onto taxpayers, only the taxpayer is made to suffer the losses. So it's not a time to celebrate, unless you are a Bank CEO looking at your 2011 bonus.
I saw magazine pics last year of some huge houses in gated communities which had lost most of their values; many of these "homes" and "communities" were now crack houses. Sounded pretty bad. But I also saw the "typical American family" standing in front of these hideous mcmansions: Mexican day-laborer types, lower castes from deepest, darkest India, and ghetto families from Chicago and New York. Oh. Lesson: It is hard to understand these alarming national stats without all the important particulars.
Fukishima 99-year Alt-A adjustable loan program coming up. Your great-great-great-grandchildren are on the note in absentia.
Ah, the joys of home ownership in middle class life. It definitely takes the fun out of clipping coupons to save $.50 on a can of beans, driving less to save gas, and recycling old furniture when the equity in your home is dropping by $1,000/month.
Check out this crazy statistic:
World home prices
http://imageshack.us/photo/my-images/843/100804worldhomeprices.png/
Two other bearish statistics:
Business establishment rate
http://imageshack.us/photo/my-images/197/businessestablishmentra.jpg/
US birth rate
http://imageshack.us/photo/my-images/135/usbirthrate.jpg/
Perhaps the Census made at the moment could lead to accidental price discovery in real estate (among other things).
Long live the phenomenon of the "rotten borough" ahem.
The numbers are the purchase and sale prices and do not include the shennanigans that may have occured in between, such as refis etc. etc. thus these looses are understated..
Fuck off Tyler it's priced in FRN's how can it be real it's just like the folks holding physical why do ou even talk about a price in FRN's they all going to evpaorate anyway.
I think a house can be a good investment under the right conditions. Purchasing at the right price point, a newer built home requiring no upgrades and little repairs, in a somewhat desirable location.
Me personally i am looking to purchase a property or two in the Phoenix market. I will give you one example of what I am looking at and you can decide if it's a good investment or not.
Pur Price: $55k
Built 2005: 3bed/2bath 1100sq ft, 4000sq lot
Phoenix surrounding area
Previously sold for $160k
Tenants already in place w/ a new 2yr lease at $750/mo.
$9k/yr gross rent
Taxes $646/yr
Insurance $391/yr
Cap Rate of 13.5% and Gross return around 15%.
Opinions?
I just bought a home in FL where the SELLER had to write a check for $270K at the closing. I asked him why he didn't just walk. He shook his head and said nothing.
Wow! That is ridiculous.
Somehow the CPR has a figured out a way to manipulate real estate prices-- own ridiculous amounts of mortgages valued at outrageous prices during a levered time and crash the market forcing everyone into the slavery of their once perceived asset.
Residential real estate can be fixed, but the policymakers won't do the right thing because control is more important than anything.
It was cheaper to own than rent for low income people and then they were forced into the street by the sellout. Corruption (U.N. Agenda 21) took over, with Chairsatan's help, kicked labor in the Fannie Mae I have another and forced low income into the BTFD Cup.
The drunken whore is devouring labor, 6.5 Trillion is really another revelation of the black hole. There is no light at the end of this, there is the dark Real Estate of the strong delusion sucking the life out of every dumb ass that continues to allow corruption to devour labor, thinking it is possible to escape correction and ones own portion of judgment by buying the BTFD Cup.
The shadow of debt upon labor has become total darkness. Labor has no cause to feed the beast, there is no light or grounds for anything to grow in this market, beyond the belly of the beast. The time has long past for correction, it's time for judgment to come upon us all. Count on it.
America is full of weak minded crazy dumb shits. They can't quantify 6.5 trillion or 14.5 trillion. There will be no attempt to restore order, no ending the Fed and the pathetic two party whore. The best thing that can be done is to individually divest as much as possible and starve the beast to death. If you do not stand fast now, and you accept what the beast is offering, shall you not perish? Of course you will. It's not a matter of if or when, your shit is already sealed in the wind. At this point you must at least make an effort to fight. At the very least you must look like you have a brain and something like a soul. The attempt to secure the global market by offering the mark of debt is tied to the prophetic false peace with Israel and all the nations. This has been the over all goal. Everything else is a side show. http://www.youtube.com/watch?v=x5wRNRtlIUo
Then what are the benefits to a short sale or a foreclusure even if you don't 'have' to? Pros/Cons?
Then what are the benefits to a short sale or a foreclusure even if you don't 'have' to? Pros/Cons?
May I point out some worse news that is NOT REPORTED.
1. As equity prices rose, many people took out home equity loans to the max limit and went on a spending spree.
2. They didn't pay federal or state income taxes on the money received from these loans as it was not yet a profit.
3. When they sell their homes, they must settle their tax bill if they have anything positive left in the sale.
--------- think about it.
So how will this affect long term pricing???
yep, keep on thinking ....