What If Housing Crashed?
Stephane Fitch and Brandon Copple, Forbes Magazine, 09.03.01
It's bad enough that the stock market's wealth effect is disappearing. What happens to the economy if that other prop, home equity, starts to wobble? There are ominous signs this is about to happen.
If you need proof of the housing boom, just walk out onto your driveway. Pick up the newspaper and read about how this vibrant sector is propping up an otherwise teetering economy. Carpenters are busy. Home equity lending is supporting a lot of consumption. Those For Sale signs your neighbors are putting up could be just big spenders wanting to cash in on the wild appreciation homeowners have enjoyed in the past six years--40% in Atlanta, 54% in New York City, 68% in Boston, 71% in Denver and 100% in San Francisco, says research firm Case Shiller Weiss in Cambridge, Mass.
The general assumption seems to be: Stock prices fluctuate, but house prices just go straight up. Could this assumption be wrong? If it is, a large part of the economy is in danger. A burst of the housing bubble wouldn't just hurt homeowners and people who own shares of Fannie Mae or Toll Brothers. It could end up squeezing all Americans. A real estate slump "could make this little recession we're having turn into something that's quite drawn out and serious," says Yale economist Robert Shiller.
forbes.com
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The American economy remortgaged
FT.com site; Aug 17, 2001
BY RISING HOUSING PRICES IN THE US ARE SUPPORTING CONSUMER SPENDING. GERARD BAKER ASKS WHETHER IT IS SUSTAINABLE
If the US economy avoids an outright recession in the next year, there will be no shortage of candidates for the credit.
Alan Greenspan and the Federal Reserve will have a good claim for their aggressive easing of monetary policy in the last eight months. President George W. Bush and the US Congress will deserve recognition for passing a tax cut that will put $100bn back into the pockets of Americans during this year and next.
But the real heroes in the front line of the battle against the slump may well be the unsung ones - people such as Jonathan Fink. Mr Fink is a 28-year-old insurance company employee who lives in southern New Jersey and commutes to work in Philadelphia. A year ago he bought a Mercedes sports car, taking out a regular bank loan to cover the cost. By this summer, paying close attention to financial developments by monitoring the internet, he noticed mortgage rates had dropped sharply, while the value of his house in suburban Cherry Hill had risen - by at least 9 per cent.
Last month he arranged a second mortgage on the property and paid off the higher interest rate car loan. The benefit was increased by the fact that a mortgage - unlike the consumer loan - is tax-deductible. The savings were substantial: "Over the lifetime of the loan, I saved $250 in interest and something along the lines of $1,700 in taxes."
Mr Fink is one of millions of Americans in the past year who have taken advantage of the most favourable housing market in a decade to leverage their spending power and reduce their financial commitments. They have used a variety of methods, including taking out second mortgages, refinancing mortgages at lower rates of interest and taking out a bigger mortgage to "cash out" equity from houses that have risen in value. Tens of billions of dollars in cash have thus been injected into the economy.
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