Analytical Wealth

Here are some quick data points from the article:

1. From 2004 – 2006 Americans pulled $840 billion/yr out of residential real estate; to give that number some perspective that an amount large enough to be the world’s 14^th largest economy on a GDP basis.  
2. The housing ATM financed $310 billion/yr worth of personal consumption from ’04 à ’06.
3. A year ago, money taken out of homes was equivalent to about 9% of total personal income, now the number is down to around 5%.
4. A 2% drop in consumer spending is enough to send the nation into a recession.
5. In 2006 20% of the personal consumption spending in California and Nevada was financed by HELOCs, it’s now down to 9%. 

(From the NY Times) “As his wedding day approached last spring, Marshall Whittey found that his money could not keep pace with the grandiosity of his plans. But rather than scale back, he chose instead, like millions of homeowners across the country, to borrow against the soaring value of his home…

… He and his bride, Holly Whittey, exchanged vows on the grounds of a sumptuous private estate in the Napa Valley. They spent their honeymoon at a resort in Tahiti.

But now, in an ominous portent for the national economy, Mr. Whittey has grown tight with his money. His home is worth far less than it was a year ago, and his equity has evaporated. And like many other involuntary adopters of a newly economical lifestyle, he can borrow no more.

“It used to be that if I wanted it, I’d just go and buy it and finance it,” Mr. Whittey, 33, said. “I’m feeling the crunch, and my spending is down significantly.”

… From 2004 through 2006, Americans pulled about $840 billion a year out of residential real estate, via sales, home equity lines of credit and refinanced mortgages, according to data presented in an updated working paper by James Kennedy, an economist, and Alan Greenspan, the former Federal Reserve chairman. These so-called home equity withdrawals financed as much as $310 billion a year in personal consumption from 2004 to 2006, according to the data.

…in the first half of this year, equity withdrawals were down 15 percent nationally compared with the average for the last three years, and consumption supported by such funds plunged nearly one-fourth, according to the Kennedy and Greenspan data…

… Only a year ago, money taken out of houses was still more than 9 percent of the nation’s disposable income, Mr. Zandi calculated, using a sampling of Equifax credit reports to supplement Fed data. By this fall, it had dropped to about 5 percent, a difference of about $350 billion a year.

…Much of the attention in the recent collapse of the housing boom has focused on those in danger of losing their home or facing higher monthly payments in their adjustable mortgages. But the broader effect on the economy is likely to come from the much larger group of homeowners who can no longer count on rising home values to bolster their wealth…

… Reno encapsulates, in concentrated form, the forces at work on American consumers. In Nevada, and in neighboring California, home equity finance was about 20 percent of all disposable income at the end of last year, according to Economy.com. This September, it was down to about 9 percent…

… Local businesses are already suffering the effects of consumers who are less inclined to buy. A Volkswagen dealership downtown said sales were down two-thirds from a year ago…

At the Meadowood Mall, near the airport, shoppers were scarce. “We’re dead,” said Cendy Rodriguez, manager at Lane Bryant, the plus-size women’s clothing store, who said business was down 25 percent over the last two months. “I don’t think it’s going to be nowhere near the Christmas we had last year.”

At Sierra Nevada Spas and Billiards, Ezra O’Connor, the sales manager, complained that not even drastically lower prices were attracting shoppers. “We’re way down, 35 percent down from last year,” Mr. O’Connor said. “People just aren’t wanting to spend.”

Mr. Whittey once seemed an unlikely member of that cohort. A sales manager at a flooring and tile company, he exudes the unflappable air of someone raised amid the easy money of the casino world. Until recently, he and his wife regularly embarked on shopping sprees of $1,000 and up.

He bought a 21-foot boat and two flat-screen televisions for their home. He sold his old truck and bought a new one, he said, “just ’cause I didn’t like the color.” Mr. Whittey could live in such fashion because his company was making good money and his house was appreciating.

Some additional thoughts regarding the article:

1. If the people discussed in the article are any indication, a lot of people really went overboard with using HELOCs to finance a “higher lifestyle”, and became entirely too comfortable with debt. It will be interesting to see if there is a backlash and people go completely in the opposite direction, if this happens, the retail sector will go into a protracted downturn as will earnings from the consumer credit divisions of the retail banks.
2. If you look at the numbers, the closing of the housing ATM is the equivalent (so far) of removing 4% of the money available to fund personal consumption or $340 billion dollars. In other words, a pool of money nearly the size of the GDP of Switzerland has been removed from the consumer spending part of the economy. Considering the numbers, doesn’t a protracted downturn in consumer spending seem inevitable and with it a decline in GDP growth if not a recession?
3. If you review the Fed’s monthly report on revolving credit balances, you’ll notice a sharp YoY uptick beginning in 2006, which falls right in line with the decline of the housing market. Obviously consumers are using their credit cards to fill in the financial gap that used to be filled by HELOCs, and are effectively exchanging one form of credit abuse for another. This practice of “credit abuse arbitrage” is beginning to fall apart, as nearly all of the major banks reported increased defaults within their credit card businesses.
4. This Christmas Shopping Season ’07 (and I suspect ’08) will not be a good one for retailers, with the biggest declines being seen in the high ticket items that many home owners used the “faux wealth effect” to finance.
5. Over the next 12-18 months signs of consumer spending “resilience” should not be regarded a positive, it should be viewed as a sign that consumers are continuing to live above their means, especially if credit card balances continue to increase. While it may cause some short term pain, the best thing for the economy right now is for consumers to pull back, get their financial houses in order and break their addiction to debt. It’s a simple question: do we want retailers to beat their ’08 numbers or long-term financial stability for consumers and the economy?

Sources:

NY Times: “Homeowners Feeling the Pinch of Lost Equity” – Peter S. Goodman, November 8, 2007

Disclosure: as of the time of publishing, the Author didn’t own a position in any of the companies mentioned in this article.