Flashback: Don't Bet The House
With the stock markets in a slump, it's a good time to revisit this EWI report on what people have been doing with that home-equity cash. "Homeowners are 'pulling money out of their property at a greater rate than ever. The consequences of this problem can be so devastating,' said an NASD official, 'that we'd really like to address this to keep it from becoming a big problem.'"
"The NASD's warning is based on data more than two years old: 'From 2001 through the first half of 2002, 11% of total funds obtained from mortgage refinancings were used for stock-market and other financial investments.' According to data on the Federal Reserve's web site, revolving home equity loans stood at $211.1 billion on Dec. 4, 2002. As of Nov. 24, 2004, the figure is an all-time record $394.1."
You can't say Wall Street didn't warn you, even if they are being quiet about it now. The situation raises the real possibility that a lot of that "equity" is already gone.
9 Comments:
I don't know anyone who invested their home equity in the stock market. Most people talk about how they put their home equity into luxury cars, boats, second/vacation homes, etc. Heck, I'd think it was a GOOD thing if someone told me they borrowed a small portion of home equity at a very low rate to invest in a high quality portfolio of good value stocks.
I don't anyone who put home equity money in stocks after the NASDAQ crash... and I DON'T think it is a good idea to start doing it now... As they say in B School... asset valuations are 'variable', liabilities are 'fixed'... you better have deep pockets if you want to play that leverage game.
Having said that, more than a few folks I know have taken their equity out by SELLING there smaller home and plowed it into larger and far more expensive homes and increased their personal real estate leverage considerably... families with two worker $100K incomes buying $300K plus homes with as little as $50K in equity... If one of them gets laid off after the bubble pops, they then they lose all...
...and we aren't talking California... there are houses around here that cost well under $200K... they didn't HAVE to do it...
Now that's nutz...
There’s an old saying that mothers often tell their children when cautioning them about staying out too late, “Nothing good ever happens after midnite.”
Well, the clock struck 12 sometime last year for the US housing market. We are now approaching 2 a.m. The bars are about to close. It’s last call and the only ones left are the rowdy drunks bellowing in a slurry manner, “But howshing alwaysh goeshh uppp”. Soon the effects of the alcohol will begin wearing off. Then comes the hangover---the dreaded morning-after.
(I'd think it was a GOOD thing if someone told me they borrowed a small portion of home equity at a very low rate to invest in a high quality portfolio of good value stocks)
When the NASD warns, you know they are doing some CYA. I think the story said 11%. That's new debt to buy stocks. And true, they blew the rest. Out of almost $400 billion, wow.
(more than a few folks I know have taken their equity out by SELLING there smaller home and plowed it into larger and far more expensive homes and increased their personal real estate leverage considerably)
There will be winners and losers. Those you describe turned a gain into a gamble.
bubblebartender,
(the clock struck 12 sometime last year for the US housing market)
We talk about timing here a lot. You may have it pegged.
John,
It would be interesting to know what they bought. I'm sure it will all come out. Grapes of wrath all over again.
Did you see this one: Pre-emptive home offers in SF:
http://www.sfgate.com/cgi-bin/article.cgi?file=/gate/archive/2005/04/15/carollloyd.DTL
I live in the neighborhood and fully expect that I'll be able to pick this home up for half the current sale price in 3-5 years. Either that, or my precious metals will be worth so much that it won't matter to me!
(Pre-emptive home offers in SF)
Sounds like google IPO money. When you get a few million dollar windfall, it's easy to pay up a few hundred K to stroke your own ego about how you burned everyone else who wanted the place. When you actually work hard to earn your wages, you tend to be more careful with it.
Let's just hope there isn't a massive homeowner bailout program when the unwinding of the debt bubble picks up momentum.
Unfortunately, we live in a time that people expect government to step in with handouts if things don't go their way. This problem may be too big to tackle, without destroying the dollar.
By the way, it would seem that using home equity to purchase 1,000 shares of JNJ would make a lot more sense than buying a shiny new Escalade or Range Rover.
We live in interesting times.
-- All Assets Will Crash --
When RE prices collapse we will be entering a debt blowoff liquidity crises. A liquidity crises is caused by desperate debtors trying to sell their assets to pay off debt. They will sell everything and anything they can get their hands on cash including stocks, cars, jewelry, precious metals, and, of course, RE.
The new bankruptcy law makes this scenario even more likely because people are becoming more averse to holding debt. The increase in credit spreads is another current indicator of this trend. Credit terms are becoming more stringent as banks become more risk averse. The choke hold will strangle debtors. It is beginning now.
What I see is a deflationary spiral dead ahead. The best position in this situation is liquidity. Hold cash or short-term US government treasuries. Everything else is going down!
People who have liquidity will be able to pickup assets at fire sale prices. Unfortunetly, there will be weaping and grinding of teeth all around. So it will feel like the end of the world when in reality it is the perfect time to plant some seeds. Out of death comes life and out of doom comes a new boom.
(Let's just hope there isn't a massive homeowner bailout program)
Punch "Resolution Trust Corporation" into google. There almost certainly will be a bailout. When large amounts of loans go bad ina fiat currency system, there is no one else to backstop.
(What I see is a deflationary spiral dead ahead)
That is the most probable outcome in my view as well.
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