Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19
Gold Price Confirmation of the Warning - 18th Mar 19
Split Stock Market Warning - 18th Mar 19
Stock Market Trend Analysis 2019 - Video - 18th Mar 19
Best Precious Metals Investment and Trades for 2019 - 18th Mar 19
Hurdles for Gold Stocks - 18th Mar 19
Pento: Coming QE & Low Rates Will Be ‘Rocket Fuel for Gold’ - 18th Mar 19
"This is for Tommy Robinson" Shouts Knife Wielding White Supremacist Terrorist in London - 18th Mar 19
This Is How You Create the Biggest Credit Bubble in History - 17th Mar 19
Crude Oil Bulls - For Whom the Bell Tolls - 17th Mar 19
Gold Mining Stocks Fundamentals - 17th Mar 19
Why Buy a Land Rover - Range Rover vs Huge Tree Branch Falling on its Roof - 17th Mar 19
UKIP Urged to Change Name to BNP 2.0 So BrExit Party Can Fight a 2nd EU Referendum - 17th Mar 19
Tommy Robinson Looks Set to Become New UKIP Leader - 16th Mar 19
Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - 16th Mar 19
Towards the End of a Stocks Bull Market, Short term Timing Becomes Difficult - 16th Mar 19
UKIP Brexit Facebook Groups Reveling in the New Zealand Terror Attacks Blaming Muslim Victims - 16th Mar 19
Gold – US Dollar vs US Dollar Index - 16th Mar 19
Islamophobic Hate Preachers Tommy Robinson and Katie Hopkins have Killed UKIP and Brexit - 16th Mar 19
Countdown to The Precious Metals Gold and Silver Breakout Rally - 15th Mar 19
Shale Oil Splutters: Brent on Track for $70 Target $100 in 2020 - 15th Mar 19
Setting up a Business Just Got Easier - 15th Mar 19
Stock Market Elliott Wave Analysis Trend Forercast - Video - 15th Mar 19
Gold Warning - Here Are the Stunning Implications of Plunging Gold Price - Part 1 - 15th Mar 19
UK Weather SHOCK - Trees Dropping Branches onto Cars in Stormy Winds - Sheffield - 15th Mar 19
Best Time to Trade Forex - 15th Mar 19
Why the Green New Deal Will Send Uranium Price Through the Roof - 14th Mar 19
S&P 500's New Medium-Term High, but Will Stock Market Uptrend Continue? - 14th Mar 19
US Conservatism - 14th Mar 19
Gold in the Age of High-speed Electronic Trading - 14th Mar 19
Britain's Demographic Time Bomb Has Gone Off! - 14th Mar 19
Why Walmart Will Crush Amazon - 14th Mar 19
2019 Economic Predictions - 14th Mar 19
Tax Avoidance Bills Sent to Thousands of Workers - 14th Mar 19
The Exponential Stocks Bull Market Explained - Video - 13th Mar 19
TSP Recession Indicator - Criss-Cross, Flip-Flop and Remembering 1966 - 13th Mar 19
Stock Investors Beware The Signs Of Recession / Deflation - 13th Mar 19
Is the Stock Market Still in a Bear Market? - 13th Mar 19
Stock Market Trend Analysis 2019 - 13th Mar 19
Gold Up-to-Date' COT Report: A Maddening Déjà Vu - 12th Mar 19
Save Fintech? Ban Short Selling. It's Not That Simple - 12th Mar 19
Palladium Blowup Could Expose Scam of Gold & Silver Futures - 12th Mar 19
Next Recession: Concentrating Future Losses & Bringing Them Forward In Time As Profits - 12th Mar 19
The Shift of the Philippine Peso Regime - 12th Mar 19
Theresa May BrExit Back Stab Deal Counting Down to Resignation, Tory Leadership Election - 12th Mar 19

Market Oracle FREE Newsletter

Stock and Finanacial Markets Trading Analysis Worth

U.S. Housing Market Equity Cushions and Impact of Negative Equity

Housing-Market / US Housing Dec 10, 2009 - 11:55 AM GMT

By: Tim_Iacono

Housing-Market

Best Financial Markets Analysis ArticleA report last month indicating that almost 25 percent of all borrowers now owe more on their mortgage than their homes are worth punctuated one of the more dramatic turn of events in the ongoing credit crisis and housing bubble aftermath. Twenty five percent!


It seems those home equity "cushions" that Federal Reserve economists used to talk proudly about just a few years ago have all but vanished, giving rise to the new, far less pleasant reality of "negative equity" as captured at Google Trends and shown below.

7

[Note: The term "equity cushion" does not have a high enough volume to register on Google Trends, but the more general "home equity" serves as a good proxy here.]

The idea of owing more than your house is worth was virtually unknown prior to late-2007 as seen in the lower half of the graphic but, once the phrase "negative equity started rolling off of peoples tongues, it went on to produce search volume of two or three times its positive predecessor and, surely, it is no coincidence that curiosity about "negative equity" peaked during the height of the credit market crisis last fall.

Negative equity - as in, not only the complete deflation of an equity "cushion", but actually falling through the chair upon which the equity cushion used to sit - was a major factor in last year's financial market melt-down.

But, it was only a few years ago that home equity was something to be embraced - and spent!

At the time, few saw it as anything more than confirmation that, in this great country (and in some other parts of the world) there really are free lunches. How else to explain how ordinary Joes could so quickly become so extraordinarily wealthy with such little effort?

There were doubters though - those labeled "bubble-heads" back in the middle of the decade and who, for years, were on the wrong side of the housing bubble argument, a side that ultimately proved to be the right side.

As best I can tell, the first time that the term "equity cushion" appeared here was in October of 2005 when the LA Times reported on the household finances of the Rodriguez family and their situation was assessed in Equity Cushion Possibilities, a piece that included the odd looking chart with a yellow background as shown below.

5

To be sure, this is blurry and hideous. That is, both the chart above and the predicament that the Rodriguezes most likely find themselves in today, however, back then, they were just doing what everyone else was doing - spending their free money.

Note that, in this 2005 piece, this "Rosy Version" of the family's future finances was followed by a not-so-rosy view as shown below.

As it turns out, their home value probably followed a path very close to what was forecast here four years ago. Based on a comparison with the Case-Shiller Home Price Index for the Los Angeles area, the curve below seems to peak about six months prior to the real world price peak and reach a bottom about nine months after the index, however, the important 40 percent decline was nearly spot-on.

6

How the finances of the Rodriguez family have held up since 2005 is anyone's guess, but, my guess would be, "not good".

The subject of "equity cushions" has been discussed here on any number of occasions since the middle of the decade, the term apparently originating with former Federal Reserve member Susan Schmidt Bies in this early-2005 speech that was chronicled here.

1From the point of view of bank supervisors, affordability products do not necessarily pose solvency concerns. Despite the apparent decline in underwriting standards, less than 5 percent of outstanding mortgages have a loan-to-value ratio greater than 90 percent, which means that the vast majority of homeowners have a significant equity cushion; in the event prices fall, only a very small percentage of owners are likely to see their debts exceed the value of their homes.

Of course, Ms. Bies no longer works at the nation's central bank, having resigned in early-2007, according to this Wikipedia entry, doing so to spend more time with her family. But, a few months ago, the government called, and now she sits on the board of Bank of America, someone with her foresight obviously an invaluable addition to this organization.

Former Fed chief Alan Greenspan was quick to adopt this new rationalization of the bubble they were in the midst of, this speech in late-2005 being his first known usage.

2In summary, it is encouraging to find that, despite the rapid growth of mortgage debt, only a small fraction of households across the country have loan-to-value ratios greater than 90 percent. Thus, the vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices.Obviously, that turned out to be an overly optimistic assessment of the situation, one of many made during the latter years of his 18 year term.

All of this brings us back to the current day and the ongoing discussion of "equity cushions" by big banks and how they might be bolstered. Homeowners' equity cushions are now long gone but, apparently, there is still a need for some padding in the banking system to avoid a repeat of last year's tumult.

What is most bothersome in this regard is that some of the same "equity cushion" arguments are being made here in 2009 about banks as were being made in 2005 about homeowners. The fact that a lot of the same people are still involved, (e.g., Ms. Bies' new position at BofA) makes it all the more scary.

Naturally, the distinction between the big banks and homeowners is that the U.S. government stands ready to bail out the former at any whiff of trouble, whereas, that latter are mostly left to their own devices.

If only homeowners back in 2005 could have somehow changed the way they were accounting for their assets and debt the way the banks can today - by marking their balance sheet items to whatever dollar amount they deemed best - maybe the housing market wouldn't still be in such a funk right now.

With equity markets now appearing to teeter a bit more each day and with banks now dependent upon November stock prices rather than those seen in March, the more you think about it, today's banking "equity cushions" are starting to look as potentially unreliable as those possessed by homeowners during the middle of the decade.

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.

Copyright © 2009 Iacono Research, LLC - All Rights Reserved

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