Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
US Dollar Gold Trend Analysis - 15th June 19
Gold Stocks “Launch” is in Line With Fundamentals - 15th June 19
The Rise of Silver and Major Economic Decline - 15th June 19
Fire Insurance Claims: What Are the Things a Fire Claim Adjuster Does? - 15th June 19
How To Find A Trustworthy Casino? - 15th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match - Video - 14th June 19
Gold and Silver, Precious Metals: T-Minus 3 Seconds To Liftoff! - 14th June 19
Silver Investing Trend Analysis - Video - 14th June 19
The American Dream Is Alive and Well - in China - 14th June 19
Keeping the Online Gaming Industry in Line - 14th June 19
How Acquisitions Affect Global Stocks - 14th June 19
Please Don’t Buy the Dip in Nvidia or Other Chip Stocks - 14th June 19
A Big Thing in Investor Education is Explainer Videos - 14th June 19
IRAN - The Next American War - 13th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match Contest - 13th June 19
Top Best VPN Services You Can Choose For Your iPhone - 13th June 19
Tory Leadership Contest Betting Markets Forecast - Betfair - 13th June 19
US Stock Market Setting Up A Pennant Formation - 13th June 19
Which Stocks Will Lead The Cannabis Rebound? - 13th June 19
The Privatization of US Indo-Pacific Vision - Project 2049, Armitage, Budget Ploys and Taiwan Nexus - 12th June 19
Gold Price Breaks to the Upside - 12th June 19
Top Publicly Traded Casino Company Stocks for 2019 - 12th June 19
Silver Investing Trend Analysis - 12th June 19
Why Blue-Chip Dividend Stocks Aren’t as Safe as You Think - 12th June 19
Technical Analysis Shows Aug/Sept Stock Market Top Pattern Should Form - 12th June 19
FTSE 100: A Top European Index - 12th June 19
Gold Surprise! - 11th June 19
How Forex Indicators are Getting Even More Attention in the Market? - 11th June 19
Stock Market Storm Clouds on the Horizon - 11th June 19
Is Your Financial Security Based On A Double Aberration? - 11th June 19
What If Stocks Are Wrong About Interest Rate Cuts? - 11th June 19
US House Prices Yield Curve, Debt, QE4EVER! - 11th June 19
Natural Gas Moves Into Basing Zone - 11th June 19
U.S. Dollar Stall is Good for Commodities - 11th June 19
Fed Running Out of Time and Conventional Weapons - 11th June 19
Trade Wars Propelling Stock Markets to New Highs - 11th June 19
Best Travel Bags for Summer Holidays 2019, Back Sling packs, water proof, money belt, tactical - 11th June 19
Betting on Next British Prime Minister Tory Leadership Betfair Markets Forecast - 10th June 19
How Can Stock Market Go Up When We’re Headed Towards a Recession? - 10th June 19
If You Invest in Dividend Stocks, Do This to Double Your Returns - 10th June 19
Reasons for the Success of the Dating Market - 10th June 19
Gold Price Trend Analysis - Video - 10th June 19
US Stock Markets Rally Hard – Could Another Big Upside Leg Begin? - 10th June 19
Stock Market Huge Cosmic Cluster Ahead: Buckle Up! - 10th June 19
Stock Market Higher To Go? - 10th June 19
The Gold Price Golden Neckline… - 10th June 19
Gold Price Seasonal Trend Analysis - 9th June 19
The Fed Stops Pretending - 9th June 19
Fed Rate Cuts Soon; Bitcoin Enthusiasts Join Wall Street in Bashing Gold - 9th June 19
1990s vs. 2010s - Which Expansion Will be Better for Gold? - 9th June 19
Gold Price Trend Analysis, MACD, Trend Channels, Support / Resistance - 8th June 19
Gold Surges Near Breakout - 8th June 19
Could Gold Rally Above $3750 Before December 2019? - 8th June 19
5 Big Lies About Precious Metals Investing Exposed - 8th June 19
ADL Predictive Modeling Suggests A Big Move In Silver - 7th June 19
US China Trade War Will Start a Recession, or Worse… - 7th June 19
Land Rover Discovery Sport Brake Pads Expected Life, Worn Pads Dash Warning - 7th June 19
The Post Room Selfies Fun at Meadowhall Sheffield, From Game of Thrones to Desert Island... - 7th June 19
SAMSUNG - South Korean Electronics Giant - Investing in AI Stocks - Video - 7th June 19
Gold Price Rally or New Bull Market? - 7th June 19
Digging into the Rising Gold: Trade Tensions, Recessionary Worries and Dovish Fed - 7th June 19
The Risky Stocks Big Lie That Keeps Many Investors Poor - 7th June 19
Gold and HUI Short-term Strength Is a Strong Call to Action - 7th June 19
Fear Drives Stock Market Expectations - 7th June 19 - Chris_Vermeulen
Next British Prime Minister Tory Leadership Betting Markets - 6th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

Home Equity Extraction - Sources and uses of "free cash"

Housing-Market / Money Supply Jun 25, 2007 - 12:42 AM GMT

By: Tim_Iacono

Housing-Market

The update to the Greenspan/Kennedy report (.pdf) on home equity extraction was a real page-turner. Seriously, it was pretty good. Economists at the Fed have once again demonstrated why they get paid the big bucks to collect data, assemble tables, and produce fifty page reports with appendices, references, and footnotes all in the proper places.

Unfortunately, as is usually the case, they didn't come to many conclusions or provide nearly enough interesting charts.


They did a great job at describing the data but seemed distracted by the "personal savings rate" question - to what extent home equity extraction may have contributed to the negative numbers that have been showing up for the last two years when the nation's spending gets subtracted from its after-tax income.

Always looking to confirm the obvious, their time would have been better spent standing outside a Circuit City querying new $2,000 plasma TV owners on their payment method and the planned disposition of the new debt just incurred. That is, was the credit card they used connected directly to their home equity line of credit or will next month's balance be paid with a future home equity withdrawal?

The report meticulously details three sources of home equity extraction - home sales, home equity loans, and cash-out refinancing - all of which contribute to what is appropriately (and ironically) termed "free cash". These are combined in the chart below showing where all the free cash went.

Home Equity 1

As it turns out the $1 trillion figure for "equity extraction" mentioned here yesterday was somewhat misleading in two ways. First, it understated last year's total by almost 50 percent (the $1 trillion was the five-year average). And secondly, most of this total did not go toward consumption in any direct sort of way, but rather, this money was reinvested in real estate or other assets.

Of course this ample source of a down payment money for the sellers' next home purchase (or two or three) factored greatly into the generally rising prices of recent years. The higher prices led to an overall increase in housing wealth providing additional equity against which to borrow, so it shouldn't just be ignored. But it's not as if homeowners were out spending a trillion dollars a year on plasma TVs and Escalades.

When looking at just the categories that could be considered consumption or "consumption-like", the chart below shows an eleven-fold increase in the last fifteen years whereas overall equity extraction above is only seven times the levels of the early 1990s.

That trend began reversing in 2006, but it was quite a party up until then.

Home Equity 2

The next two charts tell the story with which everyone is now familiar - the story of the early decade real estate-induced healing after the stock market crash.

Everyone started refinancing when rates dropped like a rock in 2001.

Those were the good old days - when you could refinance, take cash out, and lower your monthly payment once a year. More often if you needed to. It was as if money was falling from the sky and the bills never came due - it really seemed like "free cash".

Home Equity 3

Remember the story about the guy who refinanced about every six months and his lender would always ask if he wanted cash back? He had no idea that the $5,000 he kept getting was being tacked onto his mortgage balance - he thought that it was a bonus that the lender was giving him for being such a good customer.

By 2004, after the waves of refinancing took hold on the consumer psyche and home prices began to soar, the serious equity withdrawal began via lines of credit and home equity loans. Never had it ever been so easy to extract money from real estate, prompting the now famous June 2005 cover of Time Magazine with the proud equity extractor hugging his home.

Home Equity 4

Having become so fixated on the shape of the curves made by the stacked bars above, little attention has been paid to the components - personal consumption, repayment of non-mortgage debt, and home improvement.

They're all pretty much equal in the charts, but when you think about it, they're all pretty much the same thing anyway.

Whether you're using the extracted equity directly to make a purchase, if you're paying off last month's credit card bill, or if you're finally getting

By Tim Iacono
Email : mailto:tim@iaconoresearch.com
http://www.iaconoresearch.com
http://themessthatgreenspanmade.blogspot.com/

Tim Iacano is an engineer by profession, with a keen understanding of human nature, his study of economics and financial markets began in earnest in the late 1990s - this is where it has led. he is self taught and self sufficient - analyst, writer, webmaster, marketer, bill-collector, and bill-payer. This is intended to be a long-term operation where the only items that will ever be offered for sale to the public are subscriptions to his service and books that he plans to write in the years ahead.

Tim Iacono Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules