In housing debt we trust.

drhousingbubble's picture

The assumption that households are doing much better simply because the stock market is up is really a problematic understanding of how wealth is dispersed across the United States. I vividly remember a handful of parties back during the peak of the bubble where people would often quote how much their net worth went up courtesy of the housing bubble. “My home that I bought in the 1990s is now worth over $1 million.” As all of you know, until you sell the home those gains are largely on paper and many did not sell. In fact, many tapped out large portions of that equity and spent it. This is why even with home prices moderately recovering US households still have close to record low equity in their homes. It probably does not help that low down payment FHA insured loans are such a large part of the market encouraging Americans to make the biggest purchase of their lives with very little down. The Fed reported last week on net worth figures and it is worth digging deep into the data.

Home is where the net worth is for most Americans

The strong rally in the stock market has done very little to improve the balance sheet of most Americans. Why? Because most do not own significant levels of stocks or mutual funds:

wealth held by bracket

The bottom 90 percent of Americans own 6 percent of all financial securities. This same group only owns 19 percent of all stock mutual funds. To the point, the median family’s portfolio is worth well under $50,000. Keep in mind the stock market is down 10 percent from the previous peak. Does going from $50,000 to say $45,000 really change the dynamics of your typical American family? Probably not. But think of someone that bought at the peak with a FHA insured loan. Let us assume they paid $250,000 and went in with 3.5 percent down which is the most common down payment for these loans:

Home price: $250,000

Down payment: $8,750

Current home price: $175,000

Underwater: -$75,000

To reach the initial sale price, home prices would need to rise over 42 percent.

Welcome to the wonderful world of debt leverage. That massive stock rally has done very little for the typical household portfolio. Yet the now 30 percent decline in real estate values has blasted a hole in their net worth. Where are we getting the above numbers from? Right from the market:

case shiller

While the stock market is only off by 10 percent from the peaks reached in 2007, housing is still down by 30 percent. This is why the good news in the Fed report needs to be looked at more carefully:

Q3 2012 household net worth: $64.8 trillion

Q3 2007 (peak) household net worth: $67.3 trillion

So overall, household net worth is down $2.5 trillion from the peak (3.7%)

Real estate values however are still significantly down (main net worth item for most families):

Q3 2012 household real estate values: $17.2 trillion

Peak was at $22.7 trillion (according to the Fed, real estate values are down 24 percent from the peak versus the Case Shiller which shows a 30 percent fall from the peak). This is why this recovery still feels very much like a recession to the vast majority of Americans.

Even though housing values have gone up in 2012 (largely due to low interest rates increasing leverage and a massive decline in inventory) most Americans have near record low equity in their homes:


And this should be no surprise since a large portion of the market is being driven by low down payment FHA insured loans:


The market is addicted to real estate debt. This is also an explanation as to why so few new homes are being built even though the market is signaling for more property (that is, affordable property). The underreported story of all of this is Americans have very little saved up at a time when tens of thousands are reaching retirement age. As the adage goes, you have to live somewhere. But you also have to eat and pay for those medical bills plus send your kids to college. Younger buyers are opting for these low down payment mortgages in droves because of lower incomes and also, higher debt burdens from giant levels of student loan debt.

People think that somehow, a wealthier state like California has the majority of people buying homes with all cash. While this may be true in areas like Beverly Hills or Atherton, most California homeowners are deep in debt on their home purchase.

In California, only 22 percent of homeowners own their property free and clear (a much lower figure than the nationwide 30 percent figure). Not only is this the case, but a large number of Californians are underwater on their mortgages:


Roughly 30 percent of California homeowners are underwater and this figure goes up to 35 percent if we count those near negative equity. Equity in housing does count. And as the previous chart shows, equity in housing has been falling for a very long time. This is why those comments of “and after 30 years, you will pay off your house!” That was true in previous generations. That is no longer the case. According to Census data and figures from the NAR, the typical homeowner stays put between 6 to 8 years. As many know, the first few years are heavily tilted to paying interest and less on principal. Throw in the 5 to 6 percent commissions for selling a home and a good portion of the equity can be wiped out unless you are in a market with perpetually higher home prices. We got a boost courtesy of the Fed with record low rates and QE but we are likely hitting a lower bound. Even if rates maintain the boost will run out of steam to match up with actual household incomes.

The current market is heavily dependent on real estate debt. The FHA now backs over $1 trillion in mortgage debt and is providing an obscene 30x leverage for many buyers. Then you wonder why they are in the red to the tune of $16 billion and are massively increasing mortgage insurance premiums.

We are starting to see the myth of “well after 30 years you will own your home” and then these are the same people looking to hop on the property ladder once they rid themselves of their starter home in 7 years. As we pointed out, in hyper consumption states like California, very few actually own their home free and clear because of this mentality.

Keeping up with the Joneses

I have recently seen many people so blindly focused on one tiny aspect of their balance sheet diving into buying a home because they ran the numbers. In fact, one couple I know bought last year and on paper, everything looked good. Heavily discounted home compared to bubble price. Just a bit more than renting on a net-net basis. That is, until they started trying to keep up with their neighbors. First, they “had” to buy a new car. After all, that 10 year old car looked like a clunker in a neighborhood with $40,000 to $60,000 SUVs. So add that as a new expense. These cars carry a much higher insurance premium. Add more to your monthly insurance. They also needed new furniture so there goes thousands of dollars. The spending is only beginning. They now need to update the kitchen and living room to match up with other hipsters. Clearly they have not worked with contractors in SoCal. The bill is going to jump up very quickly.

This is largely what happens. They also had to put their kids in a more expensive prep school. If all goes well, these kids might get accepted to a great college (if private, look at $50,000+ inflation adjusted to the future per year unless they are super star scholars). Then add to the mix that this will be the “starter home” and they will look to move into a bigger (more expensive) home shortly. 5 to 6 percent will come off the top in that transaction.

So on paper, yes, it didn’t seem all that bad of a move to buy. Yet ancillary spending increased dramatically. Also, many younger people that buy are likely to lose one income for a period of time after a child is born if they plan on starting a family shortly after buying. If they go back to work, add in the cost of daycare. That is a sizeable hit to the bottom line.

And this is one of the items that people only focused on the numbers will miss. Consumer psychology and mass behavior. You have to examine both and this is part of behavioral economics but most can understand the common sense of this. This is why the home equity figures still look anemic above even in the face of rising home values. It is rather obvious that Americans are willing to go into massive debt to purchase (just look at FHA insured loans). The notion that everyone that is buying right now is going to stay put for 15 to 30 years flies in the face of the data. The idea that people will just buy and somehow not increase their spending to reflect that of their neighbors misses the core of our marketing driven nation. All you need to do is look at the hipster flippers and how they are tailoring their homes. This applies to many upper-income suburbs and cities. Keep in mind that with the typical US home costing $180,000 and median household income at $50,000 in raw numbers, most Americans can afford to buy (funny how that 3x annual income to mortgage ratio is coming back in line). Yet we are talking about households trying to purchase $600,000 homes with $100,000 incomes.

Some people get angry with flippers but remember someone on the other side has to close escrow on the place. In California, over 23 percent of mortgaged homes have either a second mortgage or a home equity loan:

ca mortgage status

Can you purchase in a prime neighborhood and not increase your spending? Of course. Yet the vast majority will not. You think all these people squeezing in with a 3.5 percent down payment have loads of cash? Of course not, otherwise they would go for a more conventional loan with better terms. It is interesting how the psychology of housing has shifted in the last generation. Today, we are still left with the mentality that housing is the road to riches asset class whereas in previous generations it was a place to live. You are even seeing this today where people are talking about how they perfectly timed the market. It reminds me of those people back in the high days of the bubble talking about the hundreds of thousands of dollars of equity they built up but never actually sold their home. Until you get that check when escrow closes, that money is just on paper. Many wanted the best of both worlds and simply tapped out the equity via more mortgage debt. Many can’t sell even today because they would “have” to buy an equally high priced home in the same location. That is, if they didn’t tap out their equity. There is one certainty about our economy and that is, we as a nation have very little fear of going into massive consumption debt.

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Never One Roach's picture

Mostly, it's only people who bought at Bubble prices are getting hurt; the 'money on the sidelines' is doing just fine.


"All real estate is local" and from what I see, most localities are still substantially overpriced. Shiller says house prices will fall at least another 20%.

tony bonn's picture

one of the most cogent and comprehensive treatments of this subject in a long time....and yes - the wealth effect is isolated to a few...please consider an article on the state of inventory....massive inventory does not just disappear over night as the newsfakers would have us payers are paying banksters to keep property off the market and the housing price increases of this year are due to that and hot money from abroad (and no, i am not talking about your mother in law.)

Widowmaker's picture

Housing heist?   No one saw it coming!

Housing is STILL dramatically over-priced.

The government collusionists are nowhere near done taking.

Setarcos's picture

Very good analysis.

To add:

Though it is good to own a house outright (as I once did until a divorce) it is not unlike owning a car, which also requires ongoing maintenance and depreciating value ... it's just that houses tend to last a lot longer than cars, but they are a liability too.

Element's picture

green shoots!!

dunce's picture

How wealth is "dispersed" in the USA is not our problem, and can not be fixed with "redistribution". Not saying that this was sugested, but that dispersed is just too much like obamanomics.

Marco's picture

Politics is the cause of our economic problems, wealth distribution is the cause of our political problems.

Bohm Squad's picture

Another reason to remember that your house is not an asset - regardless of what your banker tells you.

-paraphrased from Kiyosaki's "Rich Dad, Poor Dad".

Catullus's picture

So if I want to buy a used home, I should look at the furniture in the house and see if they can really afford to live there or not?  I imagine they have one or two rooms that look good, but they ran out of money and could complete the others.  Those are the ones where you can bid 20% less than asking price and they'll take it.

Pejorative Requiem's picture

Not a complete picture without numbers regarding household income. Nevermind....... who wants to dwell on bad news?

I am Jobe's picture

It only works if you are an inbredfuck in the USSA.

willwork4food's picture

I'm an inbredfuck from the USSA- but a classy inbredfuck.

Stuck on Zero's picture

The bottom 90% may not have any money in the stock market but I'll bet their pension does. 


sun tzu's picture

You mean the hopelessly underfunded pension that is desperately praying for perpetual 15% annual returns just to be able to pay out what they promised?

max2205's picture

Ha ha , pension. What pension?

Widowmaker's picture

Next heist everyone refuses to look at.

The money is already gone, and Bernanke and the justice abortion crime cleanup force are trying to fill the void with new paper. 

GAAPpreNixon's picture

If so many people are underwater in nominal terms, just think of how far down they are when you figure in INFLATION!

For those that say inflation is actually helping them, I say, HELLO? Have you noticed any REAL inventory drop in available housing? Have you noticed any REAL median pay increases to support increased home prices? NO!

Household income, the MAIN driver of home prices (beyond the rigged low interest sucker bait disguising an overpriced house),is GOING DOWN in inflation adjusted terms.

I applaud this article and wish to add a tidbit from Vermont. Colchester raised property taxes 40% a year ago. Imagine what THAT does to your finances when you buy a home you can't afford in the first place because you obtained a low monthy payment. That's been going on all over the country, particularly in "good" (i.e. already over taxed) areas.

If you make $100,000 a year, you can afford a $250,000 house MAX. That's old school accounting but still valid. Going above 2.5 times your annual income for a house is folly.

This is something I have thought much about in trying to figure out what Bernanke is trying to pull off. The fed really represents the 1%. Bernanke knows they OWN a lot of real Estate but is hesitant to trash the currency in order to bubble house prices up because everything else will go up too and the banks doing the financing at low interest rates will take a huge hit. Rapid inflation would actually help the average Joe IF the COLA increases reflected reality because he would have more nominal income to pay higher housing prices and suddenly people would be "above water" again. I don't think Bernanke gives a shit about the average Joe so he is doing all he can to keep the 1% happy by NOT letting rapid inflation (as in the 70s) refloat the housing bubble even though he secretly wants to inflate housing prices without inflating other costs of living (particulary income). This is mission impossible. The only thing that is keeping a FAKE "lid" on inflation is that income, social programs and pensions aren't indexed to real inflation and people are just going without, period.

Because of this, next year will be the year Bernanke "loses" the inflation battle and we get over 20% (MINIMUM) in government stats (the real inflation will be over 30%). Why? Because our economy isn't productive due to the huge emphasis on war and outsourcing. The dollars are coming home as we speak.

Next year you will see what an inflationary depression looks like. It's not pretty.

Widowmaker's picture

Nah, just change the model.  It's been bullshitting the poor for 40 years.


disabledvet's picture

Yep. No news in these here parts. I might add "we are now owned by ABC News" folks! (take a look below.) VERY interesting as truth gets a jumpstart here unlike anywhere else. I do agree "they have to tank the dollar." there really is no other way. other "non fascist way." We have had "extreme policies in the past." all lead to a worthless dollar which is why the Federal Government refuses to even allow Turkey the ability to pay for fuel in gold. (cuz if they allow that they might have to allow Texas the ability to do the same thing.)

Racer's picture

As for stock market gains, dealing costs, spread, inflation and capital gains tax means that the share price has to rise significantly just to break even!

tango's picture

Which is why we diversified into art, precious metals, property and food.  We don't HAVE to make huge profits - simply live reasonably for the next 40 years.  (I am in the process of getting solar, have a garden, septic tank, no state taxes - TN).  We are reviewing all market holdings in light of the Obamacare onslaught and "Cliff" deal (Munis taxable, higher dividend and capital gains tax, rocketing health premiums, etc).

Bill - Yes That Bill's picture

"That massive stock rally has done very little for the typical household portfolio."


The stock rally is - and has been all along - illusionary.

Hey... to those who win and cash out... win and cash out... win and cash out... sure, your winnings are real. No doubt about it. Congrats!

But what I'm getting at is what we all know... namely, that the modern day stock indexes are based upon intangables rather than tangables. Interest rates... Fed policies... politics... these are the factors that influence stock market valuations.

In a macro sense... the entire world economy is little more than a casino.






Seer's picture

Real estate, homes?  Ha!  That's so old-school!  Folks missed the wave- AAPL and FB!  That's where the "real" money went.  I'm now seeing that I was wrong all along: Food, Shelter and Water don't count!  </sarc>

waterhorse's picture

I learned a new term, "hipster flippers".  Hilarious.

Madcow's picture

Gov-co will raise tax rates - to force people into bankruptcy - so the bankers can scoop up their assets for pennies on the dollar. 

Once "maximum homelessness" is achieved, the Fed will get the green-light to hyper-inflate the currency and destroy anyone who survived the deflationary wave down. 

Thats' just the way it is when you have a global police state run by bankers - 


Catullus's picture

Then where will the serfs live?

Marco's picture

In the shittiest regions with the least natural beauty, in rentals.

asteroids's picture

Stupid sheeple. Buy, buy, buy!

Peter Pan's picture

If I lived in the USA I would have loved to have mortgaged my home to the hilt at the height of the boom and withdrawn the money from the bank and bought some gold. As soon as the crisis hit I would stop making payments until evicted. I would then take my stash of gold and cash and begin life afresh in a better neighbourhood.

Seriously though, so much of the FED's and the government's preoccupation has been with re-inflating the collapsed housing bubble. It ain't going to happen unless some kind of Zimbabwe solution takes hold or unless banks start handing out interest free loans to home buyers and owners with the interest paid by Bernanke.

Reality is a bitch, especially when it decides to bite.

willwork4food's picture

Yea, you would have done this right at the right moment and stopped making payments right at the right moment like everyone else...

Hindsight sometimes is 20/20, regretably we don't have that luxury.

Seasmoke's picture

20-20 hindsight is a wonderful thing for a Monday morning quarterback.

KidHorn's picture

Your plan only works if you buy on the way up and you can eventually withdraw more than you put it. The price would have to appreciate faster than your monthly payments,  I think many thought like you and ended up losing all their closing money and their house on top of it.

MachoMan's picture

The plan also only works if he finds a non-recourse state to do that in or, alternatively, is willing to lie under oath about the size of his assets (e.g. gold) following the judgment against him.

Widowmaker's picture

Lie under oath?  What the fuck is that, lawdog?

When ws the last time you saw anybody (ANYBODY) tell the truth from whitecollar Inc?

Whats good for the incorporated goose is good for the unincorporated gander.  Truth deflates the bonus pool, and that law don't go around here, lawdog.

To big to fail, and too rich to jail.  Mark to fantasy lawdog, there is your "truth" hidden in plain sight.

boogerbently's picture

From the "two wrongs make a right" school of thought, eh?

You ARE the problem with AMERICA, today.

SafelyGraze's picture

wealth effect as demonstrated by oz 

bestow/confer a

1. diploma
2. medal
3. timepiece 

dorothy: I don't think there's anything in that black bag for me
oz: look! a mortgage!