JasonC

Market Outlook: It's Still All About Housing

The wonderful thing about having legions of economists measuring every
aspect of the US economy continually, is that we don't have to make these
things up.

The Federal Reserve published flow of funds data on the US economy and
its various sectors. The June 2008 version includes positions as of the
end of 2007, and there is coverage for prior years going clear back to
1954. When someone wants to allege that US households are using debt to
do X or have shifted borrowing by amount Y, we don't have to take their
handwaving word for it. We can go get the actual numbers and see if
they bear out the speaker's line of spin.

When people talk of the housing bubble and its financial underpinings
and effects, they are talking essentially about the period from
2002 to 2007. So, what happened to the financial position of the
US household sector over this period? What happened to the position
of the corporate financial sector?

The usual narrative you see in a thousand news stories is that people
borrowed to the gills, and presumably are therefore deep underwater,
unable to spend a dime because they have pledged their entire future
earnings five times over to their creditors. Does this remotely
correspond to reality? Not for 3 anecdotal bankrupts, but to the
whole US household sector? Do we have to make up an answer?

At the end of 2007, the US household sector owned $72.055 trillion
in assets, and had $14.389 trillion in liabilities. Disposable
income after taxes was running at a $10.182 trillion annual rate.
At the start of the bubble period, in contrast, the sector owned
$47.891 trillion in assets and had $8.836 in liabilities, with
after tax disposable income running at a $7.830 trillion annual rate.

Yes, liabilities increased $5.553 trillion over that span. But
the value of assets owned increased by $24.164 trillion or 4.35 times
as much. Yes leveraged increased - from 18.45% of assets to 20%.
Hardly nosebleed territory. Income advanced 30% and net worth increased
48%. US households are worth $18.6 trillion more than at the start
of the period and are receiving an extra $2.35 trillion per year.

Every inch of upward movement in real estate prices into "insane"
territory was enjoyed by someone, and frequently multiplied by
substantial leverage. Real estate prices are higher now than they
were five years ago. It is really hard to bankrupt the nation by
that process. Can some latecomers get into trouble? Surely. Can
leveraged speculators who piled in at the top get wiped out? Surely.
But everyone who overpaid, overpaid somebody else, who got the
proceeds.

Also, very large portions of the losses are being stuck onto the
banks who financed it all. The US household sector was the group
that had the "heads I win, tails you lose" side of this bubble.

Yes, there were capital losses in the whole thing through misallocation
of resources, when houses were built for more than they can fetch
now. Most of those losses fell on the equity of the builders, some
on their lenders or suppliers and the like. In case no one noticed,
those companies have already been taken out and shot.

A household sector with over $10 trillion a year in disposable income
and a net worth of $57.7 trillion isn't bankrupt and isn't going to be.
Can we have a slowdown? Sure. But the pretence that Americans are
poor, put-upon wards of greedy bankers and will henceforth slave away
just to pay debt service, is utter nonsense from start to finish.