Here is the Greenspan Report (.pdf) upon which this article is based: http://online.wsj.com/public/resources/documents/report-fed2007.pdf Home Equity Hangover Posted on Apr 24th, 2007 http://usmarket.seekingalpha.com/article/33331 Tim Iacono submits: Yesterday's report on mortgage equity withdrawal from the team of former Federal Reserve Chairman Alan Greenspan and Fed economist James Kennedy make the words of Warren Buffet even more meaningful today than they were a few years ago. The Oracle of Omaha once said something like, "Give me a trillion dollars and I'll show you a good time too!" and though he wasn't referring to home equity withdrawal at the time, the sentiment surely applies. Bloomberg reports that between 2001 and 2005, have been "tapping their equity" to the tune of a cool $1 trillion a year "took out an average of $1 trillion in cash from home equity". Today's paper is a follow-up to research by Greenspan and Kennedy in 2005 that showed that extraction of home equity accounted for about four-fifths of the increase in mortgage debt. That paper was Greenspan's first since 1996. Including repayment of non-mortgage debt, such as credit card loans, the cash financed 2.9 percent of consumer spending from 2001-05 compared with 1.1 percent from 1991-2000, the authors said. Since Greenspan, 81, retired from the Fed in January 2006, he has been giving paid talks to investor and industry groups and writing a book, "The Age of Turbulence,'' set for release in September. In February and March, Greenspan roiled financial markets with predictions of a possible U.S. recession this year, placing a "one-third probability'' of such an occurrence. With today's research paper on the phenomenon of "equity extraction,'' though, the former Fed chief is trying to steer clear of any controversy. Some critics say Greenspan held interest rates too low for too long after the 2001 recession, helping inflate home-price bubbles around the country that are now popping and threatening to torpedo the economic expansion. Too low for too long? Preposterous! There are a couple of charts in the report that is supposed to be available at the Federal Reserve's website but it looks like you'll have to search around to find it. This link (.pdf) will get you a copy from what appears to be a public area of the Wall Street Journal Online. The first chart shows how quickly home prices have risen in the last few years and, more importantly, the ominous flattening of the "housing wealth curve" in 2006. Remember, the trick here is to keep real estate prices going up faster than real estate debt - once that dynamic reverses, then, well ... that's what's happening now. Amid the sharp increases in total real estate value in recent years, people own a smaller and smaller share of their homes - surprise! There's a bit more data in this report that may make for a few more interesting charts, specifically, how all that extracted money has been spent - stay tuned.
Greenspan Says Consumers Fund More Spending With Home Financing By Scott Lanman http://www.bloomberg.com/apps/news?pid=20601068&sid=aIv2WTbby6HQ&refer=economy April 23 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the share of consumer spending that Americans funded from extracting cash from the value of their homes doubled in the five years to 2005. The portion increased to 2.1 percent in 2005 from about 1 percent in 2000, Greenspan said in a research paper written with Fed economist James Kennedy, released today by the central bank. Homeowners took out an average of $1 trillion in cash from home equity annually during the period. The estimates are among hundreds of data compiled by Greenspan and Kennedy to help economists understand how Americans have used cash derived from selling their homes, taking out home equity loans and refinancing their mortgages. At the same time, Greenspan avoided taking sides over whether the extra cash from rising home values has actually increased consumer spending. Greenspan noted that while JPMorgan Chase & Co. economists find that mortgage equity didn't cause an increase in consumer spending, Goldman Sachs Group Inc. analysis concluded it had a ``statistically significant and economically large effect on consumer spending.'' ``Given JPMorgan's view that equity extraction is not a fundamental determinant of consumer spending, I don't find anything there that contradicts that,'' said Michael Feroli, an economist at JPMorgan in New York who used to work at the Fed. ``On the other hand, I'm sure if you were someone who believed it does have a big effect, you would probably say everything here is consistent with that view as well.'' Greenspan Research Today's paper is a follow-up to research by Greenspan and Kennedy in 2005 that showed that extraction of home equity accounted for about four-fifths of the increase in mortgage debt. That paper was Greenspan's first since 1996. Including repayment of non-mortgage debt, such as credit card loans, the cash financed 2.9 percent of consumer spending from 2001-05 compared with 1.1 percent from 1991-2000, the authors said. Since Greenspan, 81, retired from the Fed in January 2006, he has been giving paid talks to investor and industry groups and writing a book, ``The Age of Turbulence,'' set for release in September. In February and March, Greenspan roiled financial markets with predictions of a possible U.S. recession this year, placing a ``one-third probability'' of such an occurrence. With today's research paper on the phenomenon of ``equity extraction,'' though, the former Fed chief is trying to steer clear of any controversy. Some critics say Greenspan held interest rates too low for too long after the 2001 recession, helping inflate home-price bubbles around the country that are now popping and threatening to torpedo the economic expansion. Greenspan declined to comment for this article. The data may help economists better grapple with questions of how the housing slump will affect consumer spending. Americans derived an average $997.4 billion in cash a year from 2001 to 2005 through home sales, home-equity loans and refinancing loans, Greenspan and Kennedy estimated. The amount rose to $1.43 trillion in 2005, more than double 2001's $626.9 billion. About two-thirds of the cash came from home sales. Greenspan and Kennedy also analyzed the effect of home equity extraction on the personal saving rate, which dropped from 1998 to 2004 and turned negative in 2005. Greenspan's new data suggest that the saving rate was little changed from 1998 to 2004 after adjusting to remove consumer spending and non-mortgage debt repayment from home-equity extraction. Yet in 2005 and 2006, Greenspan's adjusted saving rate fell in tandem with the official data.
Cool graph. What is interesting is that the "value" line had smooth acceleration until recently. If you were to plot in on semi-log paper, it would likely be a straight line that would dip downward over the last year, almost indicating that the downward price movement over the last year is an anomaly. SM
Yeah, but how much of the helped to fuel PCE and GDP growth?I saw some charts showing how GDP would've looked like if there was not MEW in the past years but I didnt see a thing of evidence on how it was calculated and they were pretty suspect charts because they came from the 'buy gold' crowd. I want to see some fair and balanced arguments on this
sorry DAAL GDP is negative and has been for awhile..... since you need a reliable deflator to compare y/y data...the BLS and the Fed. understand that GDP can be calculated any way you want...... so the Gov. under counts inflation and magically GDP rises.... throw in devaluation, and your dollar based economy is quickly coming apart..... look at gold, oil, copper, gasoline, corn..... and inversely, the greenback is hitting decade lows..... all this ain't by accident.......
Historically stock markets drop on average 40% right before and during recessions so this would be one more instance where you conspiracy theorists claim that the incompent government was able to fool the entire stock market(the entire world matter of fact)
0.1% of the average guy on the street realizes what is happening or if he does, he feels powerless to stop it....and he's right... with a $12 trillion money supply and $40-60 trillion debt and SS/ Medicare benefit liability ahead..... the choices are few and none are good...... the real conspiracy is the American people not dealing with it....
daddyeaux - nothing personal. There is nothing wrong with being pessimistic - but why do you make statement that makes you look like a complete idiot?