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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: kris b who wrote (49031)	1/11/2006 12:47:20 PM
From: GraceZ	Read Replies (1) \| Respond to of 110194

Your logic is flawed. You neglected to mention that the entire 1.06 was borrowed against the houses. Arithmetic, son, arithmetic. 1.06 trillion into houses in the form of improvements and repairs, 400 billion out in the form of cashouts and HE loans in same time period. Subtract one from the other and what do you get? Maybe some borrow it back out once they put it in, maybe they pay down those loans on an accelerated basis, you'd have to have a peek at family balance sheets to know who did what. The data on the cashouts comes from the difference between the former loan and the new one and doesn't account for the accelerated rate of paydown that occurs after they refinance. Consider every refi loan has a certain amount of expense which is usually rolled into the loan or interest rate, few pay it in cash at the closing and if you multiply that by the sheer number of refinances that occurred in the four year period it amounts to a huge amount of money. I've not met one person yet who didn't factor how many months it would take to break even on that figure with the lower rate. Their aggregate equity never goes above 5% because they always mortgage up the difference as fast the appreciation allows. Equity in aggregate was 57% at the end of 2004. Your friends are on one extreme, my friends are on the other so they offset each other and meet somewhere in the middle. My friends are on the fourth house in this game. They never put a penny of their own money (They don't have any. It is all tied up in "equity in their houses") but piled up more debt against the three existing houses. They put their own pennies in there every time they make a mortgage payment unless the loan is IO. Regardless of what various individuals might be doing, when one is talking about macro measures you have to understand that those individuals are offset by the actions of other individuals acting opposite. I didn't say it was the same individuals that are putting money back into their houses. I don't know if that factor is even measured although I can say I have seen a data breakout on what home equity loans are intended for, i.e. improvements, pay down debt, etc. No one knows definitively what they were used for, we can just offset the two figures and come up on a macro level to conclude that on balance more money is going in than coming out. It would be silly in the extreme to ignore the vast amount of home improvement that has gone on in the last four years. I can't drive through my neighborhood without seeing new additions, new garages, new roofs, new siding and big new houses. We've built 10.5 million new houses in the last four years. Yes, much is paid for with borrowing but that was my point that it is borrowed out and put right back in, that on average, people are not consuming their houses. People tend to improve their houses when they perceive that RE prices are rising and stop doing it when prices are flat. The reasoning goes something like this when prices are flat, "I'd like to put in a new kitchen, but I don't think I'll be able to get it back when I sell." When prices are rising and rates are falling as they did those four years, they say, "We're going to put in a new kitchen. The house is worth so much more now so even if we borrow the money to do it, we still have lots of equity. With the new low rate we won't be paying any more per month than we were before."