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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Amy J who wrote (11461)	7/3/2003 11:57:06 AM
From: GraceZ	Respond to of 306849

Macro-economics (using Total rather than Median) doesn't accurately represent the individual consumer. No but it gives a great view into the strength of the economy as a whole. Individuals will always be stretched along a curve with most in the middle with less on either extreme. For the group with 50% debt service there are offsetting individuals with zero debt service who pay off their credit cards in full every month. What tells us that is that to a lot of people that debt service figure seems unnaturally low. So, Debt service isn't the same as Debt. No it isn't but in a low interest rate environment you can expect people will raise their total debt simply because most people are cash flow oriented, if their cash flow can handle the payments they will take on more debt. This could be problematic if we see a sharp up tick in rates but there is plenty of evidence that people are doing exactly what you would expect them to do in that they are swapping out variable rate debt for fixed and they are doing it in large numbers. In Dec of 1997 a broker told me 80% to 90% of all the people who buy $1M homes pay for them in cash. i.e. no mortgages. So, it could be that Silicon Valley has adjusted to higher income & stock than the rest of the country (as oppose to adjusting to only higher debt, as you suggested.) This was true in any area of the country where home prices are a million or more back in 1997. It's not as true now since it is not only the rich who are buying million dollar homes. In general, my clients in CA and NYC have a far higher debt level than my clients that are local, especially those with ordinary incomes that are consistent with the rest of the country. No one would deny what has driven up prices in California is the fact that so many there have so much wealth and income. Meanwhile those people who have ordinary circumstances have done extraordinary things with debt in order to try to get into houses, including interest only mortgages and other bizarre variations I'd never see here. This is true in high price areas in the East as well. It may be that the underwriting industry out there has gotten complacent in terms of thinking that houses always rise in price therefore the rising market will bail people out. The early 90s where houses fell in price or stagnated is still very fresh in the minds of people in my area and I find that the underwriting is a lot more conservative (even while consumer debt providers are every bit as loose). It gives me the impression folks are thankfully much better off than what the media implies. Absolutely. The media goes in cycles with these things. Back in 2000 we were all destined to be rich and no one even questioned how it was possible for ALL people to be above average. Now we're ALL going to hell in a hand basket while reality lays somewhere between those two extremes. Media also tends to lean decidedly towards the liberal side and they tend to emphasize how well we are doing with a Democrat in the white house and emphasize how baaaad things are when the White house has a Republican in place. Back in th boom the media barely mentioned the problems with the excesses that were building up (except the conservative press) now those things that weren't a problem then are now a big problem according to the press. One other possible explanation is that the publishing industry itself, which is centered in NYC, has been especially hard hit in this slow down. I have a good friend who has worked for all the major magazine publishers. Back in 2000 she was working for Business Week and I'd call her and she'd be complaining that she was working so hard and the people in her office were so overworked that they were hoping for a recession so that things would slow down. Three years later she'd working on a regular basis after intermittent layoffs but she's sure she'll be out of a job next week or next month. Other than that, people are still searching for a reason that the market sold off the way it did. It's beyond their comprehension that something could be so high and fall so low, there has to be a good reason. Now they are looking for problems in other places. Macro measurement doesn't seem like a valid measurement of the median consumer's behavior. When you are trying to look at the health of the economy as a whole it is important that you only use the macro. The mistake people and these various journalists make is that they mix macro with anecdotal stories on the micro level. While we all live on the micro, what we do as a group is best measured in the macro and it is a big mistake to extrapolate from the micro to the macro and visa versa. In other words you don't want to look at your narrow experience and make judgments about what is happening to the country as a whole and you don't want to look at the macro and say that all or most individuals are doing this or that. If you remember the original discussion was on the macro level, whether debt was a problem in the country and if it had risen to an unserviceable level against all the households. The economy on a macro level is in far better shape than a great many individuals AND there are a great number of individuals who are in much better shape than what is suggested by the macro. It works in a modest inflationary economy, but not a deflationary economy. True and we have an inflationary environment. It is ludicrous in the extreme to me that there is so much fear about deflation right now. But it's amazing to see housing prices increase even after the stock bubble burst. At this point, I think new buyers are mistakenly carrying more housing debt due to the resulting confidence from increases in housing prices. I discussed this on another thread, that there is an element of investment to a house and people buy houses with the idea that they will appreciate in price. I had several people who told me that consideration doesn't even come into play but it does. I think if you did an exit interview with buyers leaving a closing and asked them whether they thought that their house would be higher in price in the future (say ten ears) almost no one would say they thought that their house would be worth less in the future. As for larger debt levels, yes, in a rising market people are more confident, but as you can see from the Federal reserve figures, the mortgage debt service figures are not out of line with other periods, so people are taken on a bigger amount of debt but the servicing is consistent with other periods. Being in a period with record low rates makes this possible. - People who are anti-debt are taking a bath by not taking advantage of the lowered interest rates. Leverage is very useful for making money in an up trend but it works in both directions and the jury is still out which group will do better in the future. What it comes down to is what is it that allows you to sleep at night. On the whole that group which collects the time value of money from the group that pays it does far better over the long run. In the short run there are always hotshots who make a pile leveraging themselves up to the hilt, just ask Donald Trump (who has been BK twice now). But while today's environment is very interest rate "friendly", there were 1.5M people bankruptcies and 1M auto repossessions over the past year - A banker once told me that BO peaks two-three years after the start of a recession. Basically this is because it takes that long for the over leveraged to run through their resources. Considering the severe drop in the value of the stock market over the preceding three years, I'm surprised that the number isn't a lot higher. so what happens when interest rates go up, considering banks apparently have a 57% exposure to mortgages? Since most mortgages out there are now fixed the people who lose the most are those holding the bonds. Michael Burke once told me that mortgage backed bonds were bonds that were long term if you guessed wrong about interest rates and short term if you were right. This is why there is such a steep difference between the short and the long end. If interest rates rise, all bonds suffer. How can the gov't guarantee all or a portion of that money? Seriously, how? How large is the guaranteed amount? There is no government guarantee, losses are passed down to whomever holds the debt (anyone holding GinnieMaes) and those that insure it. What there is, is a bunch of public and private companies that are in the PMI insurance biz. These get taken out first. When people say Frannie or Freddie has a government guarantee they are assuming that the government would bail them out. They argue that the guarantee is implied. There had better be jobs available for folks before interest rates go back up. Unemployment is now as high as it was in 1993-94. Consider that C&I demand for loans is still dropping and people are arguing whether we should be fighting deflation or inflation it's hard to imagine interest rates rising sharply anytime soon. This could change overnight if things heat up. So far we're more worried about a failure to accelerate more than overheating. The banks are stuffed full of reserves they can't make loans on. We're sitting on a huge pile of cash with no where to go with it that would stoke the economy. - Mature businesses who find banks chasing mortgage deals more than mature business deals. (Obviously, lowering interest rates have stimulated the housing industry, more than the high-tech industry.) Only because there is no demand any where else, the demand for C&I has fallen off a cliff. I've spoken before about this, housing is a dead-end, it has no value add, there is no multiplier effect like there is when loans are made to business buying capital equipment. This is the worst aspect of all this money flowing into housing, not the debt levels.