Where Has All the Equity Gone?
The bond market rallied this week, long-term rates falling, unfortunately in response to lousy economic news. Lowest-fee mortgages fell to 5.00%, and the 10-year T-note has approached its next key level, 3.60%.
Every item in this grim litany was forecast to improve, and none did. The Conference Board’s measure of consumer confidence in February collapsed to present-conditions 19.4, the worst since 1983. New claims for unemployment insurance jumped again, now almost back to a half-million weekly. New mortgage applications fell 8.5%, now to 1997 activity. January orders for durable goods fell 2.9%, excluding volatile transportation and military sectors. January sales of new homes suffered an 11.2% cave-in (the lowest rate of sale since 1963), and sales of existing ones dropped 7.2%.
Thursday morning’s business channels broadcast striking visuals: Perfesser Bernanke on split-screen left, asserting “nascent recovery”; Mr. Obama split-right, nouveau Nero obsessed with health-care fiddling; and from the screen-top data-stream the sad data listed above drifted down in little red embers.
As births go, this recovery is in ICU, but the Fed dares not say so. Just keep its rate at zero and visit the chaplain. The Health Care Summit collected the most unattractive group of politicians in modern times: John Boehner as the young Capone; Eric Cantor’s veneer of feckless ambition covering a core of feckless ambition; Nancy Pelosi the socialite annoyed to be called from dinner to quell a spat among the help; and Harry Reid as sour undertaker. Mr. Obama has law-school moot court competition confused with governing.
Good grief, people... the economy... the economy.
Now 18 months past Lehman, trillions in spending and tax-cut stimulus, support for financial markets and MBS purchases, the Fed easiest-ever... why no real recovery?
In a recession different from all prior, find explanation by hunting for the most uniquely different element in the overall pattern. One stands out: never before have households taken such a hit to net worth, and never at such a sensitive spot. Home.
We have had awful housing markets before, notably ’79-’82, when mortgage rates reached 18% and unemployment 11%. However, that was a time of very high inflation: a house worth $100,000 at the outset often still was at the end, the loss to the owner inflicted by inflation. That quirk of inflation meant that equity remained stable, nominal value versus mortgage, thus in those years there was no plague of underwater houses.
In the later 1980s, the total of American mortgages outstanding divided by the value of all homes led to an aggregate loan-to-value ratio in the 32%-38% range (All data here from the Fed’s Z-1 Flow of Funds). From 1990 to 2000, LTV crept to 42%. At the peak of the Bubble, in 2006, overall LTV was still only 45%: $22.9 trillion in value versus $10.4 trillion in mortgages of all kinds, 1st and 2nd. The nation’s homeowners held $12.5 trillion in home equity.
Then the catastrophe: by the 1st quarter 2009, mortgages outstanding were still about the same, but aggregate home values fell to $15.7 trillion. Seven trillion dollars in home equity wiped out, one-third of total value, but two-thirds of equity. In two brutal years, aggregate LTV shot up to 66%.
Now the bad part. Only 70% of US homes have mortgages. If the total value of homes is about $16 trillion, the 70% with loans is worth about $11.2 trillion. The loans total $10.8 trillion today. Of course, many homes, maybe 20 million, are underwater, and a great many mortgaged homes have a lot of equity, especially in the huge, Bubble-free heartland, Colorado to Texas to the Dakotas.
However, on average, 70% of American homes have no equity. Bye-bye consumer.
Instead of more toothpaste-back-in-tube mitigation, how about an effort to support modestly rising home prices? And to absorb the millions of mothballed foreclosures? Either restore adequate credit, or stay in this.