"wealth shifted away from tech/Internet and stocks in general to real estate..."
"$3 trillion in wealth that was so abruptly lopped off the top of the Wilshire since its peak in March 2000 has resurfaced in the real estate market."
Homeowners have seen the value of their homes appreciate $2 trillion to $3 trillion over the same timeframe.
The great bubble transfer
By Bambi Francisco, CBS.MarketWatch.com
Last Update: 5:41 PM ET April 5, 2002
SAN FRANCISCO (CBS.MW) -- Around this time two years ago, the economy was the best in generations and the Nasdaq was over 5,000.
That was until the bubble burst. Was all the wealth lost? Someone who held Yahoo shares at $200 (YHOO: news, chart, profile), AOL Time Warner (AOL: news, chart, profile) at $70-plus or EBay (EBAY: news, chart, profile) at $121 might be nodding his head.
But not all was lost. The wealth shifted away from tech/Internet and stocks in general to real estate, according to Stephanie Pomboy of MacroMavens, who, at the end of February, left reputable research firm ISI to start her own research outfit.
Pomboy writes in her piece titled, "The Great Bubble Transfer," that the "$3 trillion in wealth that was so abruptly lopped off the top of the Wilshire since its peak in March 2000 has resurfaced in the real estate market."
Homeowners have seen the value of their homes appreciate $2 trillion to $3 trillion over the same timeframe.
Unfortunately, the home might be the new margin account as consumers leverage against unrealized gains, she said. She points out that the average cash-out refinance is $34,000. Yet the median home price is just $150,000. This means Joe Smith is extracting 20 percent of his home value.
One might argue that it's unfair to compare the average cash-out with the median home price, but the big picture still remains that consumers are highly leveraged. In Pomboy's note, she shows that homeowner's equity relative to home value has dropped significantly since 1980. Additionally, the mortgage-debt service as a percentage of disposable income is at its highest level since at least the start of the '90s, Pomboy points out.
The numbers reveal a "speculative fervor that makes the Nasdaq mania look tame," Pomboy said. Her concern is that the high debt levels will not be alleviated by lower interest rates as the Fed has already driven down the fed funds rate by 73 percent.
The question then becomes: how does one service their mortgage if they've lost their job?
To be sure, there are signs that consumers are keeping their finances under control. Borrowing has increased at a slower pace so far this year, after aggressive monthly gains for much of 2000 and even in 2001 as the economy slipped into a mild recession. January's consumer credit was revised to show a smaller $7 billion gain from the $12.8 billion increase as first reported by the Fed. See full story.
What's more, housing prices are stable and there are no signs of distressed selling, at least in the Bay Area. That's because they've already come under pressure.
Commercial properties have dropped by more than half since the peak while residential properties have fallen between 10 and 25 percent, said Mark Conroe, real-estate developer in the Bay Area.
Excluding the peak prices, however, home values have appreciated since pre-bubble times. In one example, a home in San Francisco's Pacific Heights was purchased for $800,000 in 1997 and sold for $1.85 million in early 2002, Conroe noted.
The median price of a home in San Francisco appreciated 36 percent from 1999 to 2001, according to Callum Hutchins, real estate representative at Pacific Union Real Estate. During the same period, the Nasdaq fell 15 percent.
It is important to note that San Francisco is one of the top five most expensive places in the country, according to Hutchins.
"It's hard to extrapolate from what happens here. But, at least in this market, there were a lot of people who made money in the tech bubble and paid cash for homes," Hutchins noted.
For example, there was one home that had 25 bids for an asking price of $3.2 million. The final price was believed to be in excess of $5.9 million, Hutchins said. "This says to me that there are at least two dozen people who can pay that amount of cash for real estate."
"Ultimately, there is a fair amount of wealth in the system (local economy) and what you see is a resilient housing market, particularly in homes up to $2 million," said Conroe. |
