 | August 15, 1945, was V-J Day. In the same year, the Fed started tracking homeowners' debt on their houses. |
From the AP:
"Homeowners' portion of equity slipped to downwardly revised 49.6 percent in the second quarter of 2007, the central bank reported in its quarterly U.S. Flow of Funds Accounts, and declined further to 47.9 percent in the fourth quarter -- the third straight quarter it was under 50 percent.
That marks the first time homeowners' debt on their houses exceeds their equity since the Fed started tracking the data in 1945.
. . .
Moody's Economy.com estimates that 8.8 million homeowners, or about 10.3 percent of homes, will have zero or negative equity by the end of the month. Even more disturbing, about 13.8 million households, or 15.9 percent, will be "upside down" if prices fall 20 percent from their peak".
21 comments:
*Sarcasm* What? How can this be true? I keep hearing from realtor experts and mortgage experts that the largest percentage of the US population now "own" a home than ever before due to "innovative" products. Our president also told us that we have an "ownership society." Does this mean the 'experts' are wrong!? */Sarcasm*
Stealth4,
I think there are alot of people out there that are having trust issues in what they hear from the Bush administration and other sources. I have seen way too many times facts misrepresented or not explained clearly. What's the ole thing about taking stuff with a grain of salt...
In this case, both can be true. You can have an "ownership society" (i.e., more people than ever owning their homes) AND have a lower percentage of the value of all homes in the country being owners' equity.
It's also possible that this lower percentage value is in absolute terms much greater in value (in inflation adjusted dollars) than the equity owned as a whole was in 1945.
To illustrate (and I'll make up the numbers to make this easy to illustrate):
1945:
Total value of all houses: $10 B
Total equity percentage: 55%
Total percentage of families owning their own homes: 50%
2008:
Total value of all houses: $100 B
Total equity percentage: 45%
Total percentage of families owning their own homes: 70%
Comparisons in absolute terms:
In 2008, 40% more families are in an owner-occupied house than in 1945. (i.e., 7 out of 10 Americans vs, only 5 out of 10 Americans). GOOD THING
In 2008, families had $45 B wealth in their homes vs. $5.5 B in 1945. (I.e., in inflation adjusted dollars, familes as a whole owned almost 9 times more wealth via their homes now than in 1945). GOOD THING
Now, what's the bad thing? that it's easier to leverage yourself into a house worth far more than today than yesterday? The average house is today something like 3 times as large as the average house in 1945. It has unheard of conveniences in it (a/c, central heat, dishwashers, dryers/washers, cable tv, Internet access, programable lighting, music systems, garage doors with automatic openers, insulated windows and walls, etc. etc.)
I'm not sure I see the sad story that this blog was supposed to tell ... I see an American success story.
"I'm not sure I see the sad story that this blog was supposed to tell ... I see an American success story."
There are no American tanks in Baghdad.
Lance,
This blog is not telling a sad story. More affordable and better-quality houses are a good thing. A housing bubble finally bursting is a relief.
I think the sad story would have been the continuance of the 20% housing affordability in Northern VA.
Every once in a great (and I do mean great) while lance says something smart, the above comment was not one of them. There is one reason why Americans "own"/rent more homes from the bank. Its called DEBT!!!
Sure, I can "own" anything I want if you give me enough of a credit line for me to hang myself with.
You want to talk about wealth . . .
Year Household Debt-to-Income Ratio
1945 .17
2008 1.27
http://www.demographia.com/
db-usdebtratio-history.pdf
The really scary thing . . .we didn't go about 1.0 until 2001. It took 14 years to go from .73 to 1.0, but only 7 to go from 1.0 to 1.27. In other words, much of the "growth" of the past 7 years, hasn't been real growth it's been growth fueled by an increase in debt.
And yes we have more conveniences today, that's called the ADVANCEMENT OF SOCIETY. But advancement in society is not an increase in wealth.
Look at those #s again . . . sure people may not have owned as much stuff . . . but they weren't SLAVES to debt. Today we own more stuff, but we are complete slaves to debt.
Household debt is 1.27 times household income!
This whole thing will finally be over when society realizes
DEBT IS NOT WEALTH!!!
idiots!
Just like gte said.
Debt <> Wealth.
Live in a house with mortgage <> Own a house.
especially when the house value is less than the mortgage amount.
GTE and RABBIT,
I disagree with you. Bottom line is that with what we earn (in our inflated/devalued dollars of 2008), we live far far better today than people did in 1945. Even I remember when it was unusual for kids to have their own rooms (ever see the Brady Bunch or Leave it to Beaver?) or houses to have more than 1 bathroom for everyone to share. Garages? Those were for the wealthy. Ditto air conditioning, dishwashers, and dryers. ... And I'm not that old (i.e., I wasn't around in 1945 ... or even close to it.)
Numbers are relative. Yes, you might have been able to buy a brand new car in 1945 for under a $1,000, but you also were probably earning less than a $1,000 a year back then. Cars, houses, everything took a lot more hours of work to buy then than they do now. Ditto buying a house. We are very lucky to be living now and being able to buy our housing for less than our ancestors did. The problem is though, that some of us don't realize that. We base our expectations on what "we think" everyone around us has .... The magic of Hollywood.
harriet said:
"I think the sad story would have been the continuance of the 20% housing affordability in Northern VA."
And that is changing, thankfully. I just don't think it will change by way of a bubble as some people think. For good or for bad, once price levels rise they don't drop. (Yes, I realize that in the exurbs asking prices on yet-untested areas went down by 10%-20%, but like transitional areas in inner cities, these areas are the expections. I saw an interesting graphic somewhere earlier today. Did you realize that the ONLY states where prices overall have dropped since 2005 are California, Florida, and some adjoining sunbelt states? Most other places have either stagnated (Washington as a whole) or gone up.
So, getting back to affordability, it will right itself as employers realize that to attract the talent they need, they will start to raise salaries offered to newbies coming here. That will start the ball rolling for all of us to have higher salaries. Meanwhile house prices overall will stagger while salaries catch up.
*meant to say "stagnate.
@lance on affordability -
The first housing development was Levittown, in Long Island, built to house returning GIs.
The average wage of returning GIs was approximately $9,000 per year.
The average Levittown house was $13,000 total, all in.
The ratio held true until the 60s.
It was possible, back then, for one wage earner to sustain a life for a family of five.
Please give long consideration to the above comment. Check it out. Don't take my word for it. Come back and call me a liar if I am proven wrong.
Thank you.
Yes, I realize that in the exurbs asking prices on yet-untested areas went down by 10%-20%, but like transitional areas in inner cities, these areas are the expections.
Lance, I live in Alexandria in a townhome, within 1/5th a mile of the metro. At the height, townhomes were selling for $440K-$460K. Now townhomes in the neighborhood sell from $308K (foreclosure) to $380K. Believe me, this pricing pressure is moving inside the beltway.
"None so blind as those who choose not to see."
yes lance, numbers are somewhat irrelevant thanks to the Federal Reserve who continually debases our currency. However, with inflation adjustment they can take on some meaning.
Yes lance, we all "own" more stuff today than 1945. People in poverty today would probably live like upper middle class in 1945. Just b/c we have advancements in society doesn't mean we are wealthier.
I believe true wealth is determined by how long you can sustain yourself and your family at your current standard of living if the funds were cut off. I.e. true wealth means being financially independent.
You hear it all the time, football players, musicians, etc, who at one time had a lot of "stuff", they got injured, career tanked and now they are working MickyDs. They might have "owned" a lot of stuff, but as soon as the funds were cut off, they were toast.
Give me enough debt/credit lines and I can live like a playboy . . . but that doesn't mean I'm wealthy. It means I'm broke and in debt and eventually at some point (unless I either turn down my debt, or make a lot more money) it will catch up and I will no longer "own" any stuff.
You can have a lot of stuff, but if you are living beyond your means, it is a complete Ponzi scheme and at some point you will lose your stuff. We have a LOT of poor people in this country who pretend to be rich. Economies don't go up forever, and at some point you will lose your job. At that point, we will see who has clothes and who was just pretending. Most will find out that the Emperor really does have no clothes on.
Again, personally I believe true wealth is determined by how long you can sustain your standard of living in an economic downturn-not how much stuff you have.
zapoteca,
average wage in 1945 was $1,299.
http://tiny.cc/Opfdm
Lance: "For good or for bad, once price levels rise they don't drop."
Really? So even the NAR, real estate shills that they are, is wrong when they have stated that nationally prices have fallen year over year? That Case-Shiller is full of it when it states 17 of the 20 largest housing markets fell in value in December?
That's ridiculous!!
Listen, my family owns real estate in a few different places along the east coast, so I have skin in the game if the housing market crashes--I certainly don't want that to happen. However, realistically I know that it is likely to occur in the short term. They're not highly leveraged (total LTV <10% overall), so I'm not that worried about prices slipping. If they were 90% leveraged, I certainly would be, though. Prices are falling, like it or not--even in some of the best neighborhoods, although they are certainly not falling substantially there (at least not right now).
I am in my late 20s, married, with fairly stable income and a 20% down payment ready for when we find the right place (I currently rent a pleasant condo in Arlington for ~$800 less per month than it would cost me to own). If we find the perfect place at the right place, I will pull the trigger, but I am completely realistic that there is a healthy chance it will fall in value the first few years we own it.
To think otherwise is truly crazy right now. Local factors are certainly hitting and will continue to hit some areas worse than others (I'm talking about you, Woodbridge), but national macroeconomic factors are providing a ripple effect across housing EVERYWHERE (even $10M brownstones in Manhattan), and we are far from seeing the final results of this.
I am more than willing to admit when I'm wrong about something, but it amuses me when people not only can't admit they're wrong, but when they appear to be living in an alternate universe.
Sean said:
"However, realistically I know that it is likely to occur in the short term."
Exactly ... SHORT term. A basic principle of buying a house is that you don't buy it if you don't plan on being there at least 5 years. Transaction costs alone will guarantee you that it would have been cheaper to rent than to buy if you are planning to stay less than 5 years.
In the long term (i.e., the term that applies to people buying a house), prices do not go down. The market conditions today are very similar to the market conditions when we were in in the mid-70s. Oil prices shooting up, war debt adding up. The Fed's first response was to lower interest rates which started a spiral of inflation of everything including house prices. It also stalled the economy further. It wasn't until the late 70s that the Fed raised interest rates to the double digits (mortgage rates were at 20% for a while there) and "stagflation" began to be conquered. BUT house prices in the meantime had soared ... not only in nominal terms ... but in monthly costs. A 20% mortgage is more than just 4 times more expensive than a 5% one.
A lot of what's being said here is this: As housing prices decline, housing becomes more affordable.
Is there anything wrong with this assumption?
How do you know salaries aren't going the same way as the housing market?
Did you see the news today? You now have an oversupplied labor market. And that's going to put downward pressure on salaries -- and not just because of the economy. Global sourcing has been putting pressure on salaries, and my concern is that it will act as double-whammy (much like the housing and credit bubbles) on wages.
The ongoing discussion here about what is affordable is premised on some assumptions concerning the labor market, salaries, fixed mortgage interest rates that are say less than 9%, and less than prohibitive downpayments. It is premised on a long list of future conditions, all unknowns.
The bottom in the housing market is relative. There will be a "bottom" a low point, but that "bottom" may be totally disconnected from what you can buy.
The bottom hinges completely on your salary, job and external factors that may really hurt your ability to buy such as the interest rate (remember the double digit interest rates in late 1970s early 1980s?), and size of downpayment. The housing market may hit "bottom" and you are still unable buy.
Bottom line: If you are waiting for a green light on this list, some consensus that the bottom has reached in the housing market, you may be renting for a very long time. Of course, people here argue that renting is a great course of action because it gives you more money to invest in the market, which is by the way, is down at least 10% over the past 12 months. But of course the stock market will go up. Remember the 1970s. The entire decade or Japan?
No KOB, its about dollars and cents. A slapped up townhouse with crown molding was not worth $600,000 in 2006 and I would not buy it. But someone did who had more dollars than sense, but now we see they had no dollars too!
Wages go up and wages go down, whats your prediction? go ahead and state your prediction on wages. But, housing is a bust and don't try and link it to something else and call the bust nonexistant.
People who bought to flip will hurt, thats called gambling. People who write mortgages will hurt, thats calls for getting a new job.
>No KOB, its about dollars and cents. A slapped up townhouse with crown molding was not worth $600,000 in 2006 and I would not buy it. But someone did who had more dollars than sense, but now we see they had no dollars too!
Wages go up and wages go down, whats your prediction? go ahead and state your prediction on wages. But, housing is a bust and don't try and link it to something else and call the bust nonexistant.<
I am not advocating bubble buying.
Buy when you think the market has hit bottom.
The problem is that pricing bottom may be shaped events that may continue to make buying unattractive, such as high interest rates, unstable job markets, and wage pressures.
kob, are you lance-a-light?
You've got to be an absolute idiot if you are taking the money you are saving on rent and putting it in the stock market right now. Stock market is in a bear, and will be for a couple of years. I'm putting that money I would be spending on housing and putting it where it is making money . . . commodities and precious metals. Shoot my silver holdings are up 50% over the last year.
Actually for people who save, a housing bust is wonderful . . .they CAN buy when no-one else can afford to. I don't give a rip what interest rates are . . . I've got it covered. A higher interest rate just motivates me to pay off the loan sooner.
And yes higher interest rates and higher downpayment are GOOD THINGS!!! It means people actually have to save before they buy, work before they buy, and won't be treating houses like stocks! No more NINJA loans, no more 2-year ARMS, hallelujah!!!
People living within their means . . . what a freaking novel concept!!!
>You've got to be an absolute idiot if you are taking the money you are saving on rent and putting it in the stock market right now.<
I didn't say I was doing that.
>Shoot my silver holdings are up 50% over the last year.
>
Congratulations.
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