Home Equity Frenzy !

Today’s must read MSM piece is a page one NYT article on how second mortgages — "the borrowing of last resort, to be
avoided by all but people in dire financial straits" — became transformed by a ubiquitous
ad campaigns into "universally accepted" forms of credit.

Home Equity Frenzy Was a Bank Ad Come True — part of the NYT’s the Debt Trap/Pulitzer bait series — is a fascinating study in consumerism, advertising and financial ignorance (ads can be seen here).

As we noted back in March via, the Federal Reserve released data showing that, thanks to HELOCs and MEW, Household Equity was at all time lows. As the chart below shows, we crossed the 50% household equity level For the first time since World War II. In the 1980s, that
figure was 70%.

Equity versus Debt
Chart via NYT Debt series


The one thing I haven’t really seen explored in this series has been the reasons why the sudden embracing of debt took place.

My own view has to do with the aberrant nature of this economic cycle. Instead of being employment and wage gain driven, causing a virtuous cycle of hiring, spending, and capex, and more consumer spending, it was backwards, unusually dependent upon ultra-low interest rates, housing and asset appreciation.

Is it any surprise that the weakest post-recession economic recovery since WWII in terms of job creation and wage gains led to an enormous debt creation? People are loathe to give up their standard of living, and they will — and did — go deeply into debt to maintain their "lifestyles."


Federal Reserve: Household Equity at all time lows (March 06, 2008)

Home Equity Frenzy Was a Bank Ad Come True
NYT, August 14, 2008

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  1. Jeff commented on Aug 15

    But hey, according to some “economists” and MSM pundits, if you got a new car, a flat screen tv, pool, remodeled kitchen, bathroom, and a few vacations out of it, you did very well and are much “richer” than you had been. I mean, 50-60 years ago, people didn’t even have microwave ovens!…….um, not so much. until the bills come due and you gotta pay them back.

    The “gains” for most people over the past 7-8 years are a complete illusion. Not real “wealth” creation, but just a period of accumulating stuff in return for putting your castle (house) in hock. Brilliant move folks.

  2. leftback commented on Aug 15

    Risk (or the perception thereof) was abolished during this period, because housing prices ALWAYS GO UP. A look at the last set of US credit figures shows that the source of new debt has shifted now that the house is no longer the ATM.

    Now, how much longer can credit card debt rise? Until we see a significant rise in defaults. Who is on the hook for those losses? Yes, that’s right, the usual suspects…..

  3. Barry commented on Aug 15

    The good news is that you can pick up all of those toys — fast cars and cool boats — for cheap!

    Assuming you still have the cash/credit to do so.

  4. Damian commented on Aug 15

    What amazes me is that I’m still being offered these lines of credit – crazy!

  5. Bruce commented on Aug 15

    What on earth has happened to CNBC?

    I saw Steve L. making the case this morning that the equity markets were getting ahead of themselves because of the continuing severe credit problems we have here in the US!!

    Has Rod Serling come back from the grave??

    The man looked like Steve Leishman, talked like Steve Leishman….

    Can your pollyanna titer go down with time?

    Bruce in Tennessee

  6. Uncle Jeffy commented on Aug 15

    Robert Frank (Prof. of Economics at Cornell and occasional NYT columnist), in his book “Falling Behind,” has delved into this phenomenon fairly extensively. It’s a short and easy read and very illuminating – increased indebtedness is only one what that middle-income households are attempting to emulate the consumption patterns of higher-income households. Others include longer commutes, longer working hours, increasing sleep deprivation, and cutbacks in public services. And – consistent with the graphic evidence you’ve provided – it coincides with the rise in income inequality that began during the 1980s. But, as always, just read it and make up your own minds.

  7. Econoclast commented on Aug 15

    International Herald Tribune chimes in as well. link

  8. GB commented on Aug 15

    Amen BR. I believe your right on.

    I also don’t forget the role Fannie and Freddie had in this and the demand for subprime and Alt-a loans by CDO/hedge funds driving the home market. Not to mention all the new investors it attracted. 20% a year is a great return.

    In engineering problems usually occur by a sequence of events that wasn’t anticipated or tested for. It made me laugh when the financial engineering comments came out a few months ago. It all made sense to me then. A lot of factors drove this wild frenzy. Now i’m interested to see how it will be fixed. Lessez Faire anyone?

  9. ron commented on Aug 15

    “emulate the consumption patterns of higher-income households”, I call this the “designer lifestyle” which is reflected in just about every corner of American luxury driven consumer behavior. Its an interesting life to own mulptile homes in different parts of the country,vacation at will,remodel until you drop but for the middle and upper middle class this is a debt trap.

  10. BP fan commented on Aug 15

    ***People are loathe to give up their standard of living, and they will — and did — go deeply into debt to maintain their “lifestyles.”***

    Seemingly with the “aspirational” crowd, shopping at JWN/WFMI, drinking at SBUX, granite/marble kitchens became the “default” middle-class standard lifestyle.

    I think as the outsourcing trend continues up the white collar ladder and low-wage pressures mount, the mountain of serviceable will come crashing down.

    BR, you should also share the NYT article on white collar/Wall Street outsourcing to India.

    Long Corian, short granite.

  11. kanadeoin commented on Aug 15

    great article,now is the time for the brain washed simple folks to start a class action law suit to recover losses against all the perpetrators of this racket. i do not include in this the so called slick decieptful conman types in or the knowledgeble gready educated something for nothing crowd.

  12. Steve Barry commented on Aug 15

    A lot of people lost their minds…some still haven’t recovered them. Take Bob Pisani for example. He concludes that since the dollar is rising, the US must be recovering sooner than the rest of the world. Doesn’t dawn on him that the rest of the world is tanking just as hard right now, the dollar is getting an oversold bounce, but US is still heading for disaster. If Kudlow weren’t on vacation, he would be taking credit for “King Dollar.”

  13. GB commented on Aug 15

    The banks also forgot that 2nd Mortgages are lucky to get 10% of the value back during the foreclosure process at least in IL. This is why they should be loans of last resort.

  14. Namazu commented on Aug 15

    Question for Team TBP: how much of this would have been possible without an endless supply of cheap funding from the Fed? People who take Caribbean vacations with the proceeds of their HELOC are unlikely to hold much in savings and checking accounts–banks’ traditional source of funding. Under reasonable assumptions, is it possible to paint a scenario under which a feedback loop between the leverage of the banks and their customers would have limited the carnage, or is that too George Baily?

  15. Jeff commented on Aug 15

    “Bullish” Bob Pisani knows full well that people don’t watch him and CNBC if they provide any semblance of reality (in this case, bad news), so the “happy talk” goes on and on…..

  16. Todd commented on Aug 15

    Can the interest on a home equity loan be written off on taxes like mortgage interest?

    If so it would seem to make sense to assume debt in this way vs other ways.

  17. zell commented on Aug 15

    Universal deleveraging yields death by a thousand cuts.

  18. Uncle Jeffy commented on Aug 15

    “Bullish Bob” – only need one more “t” and you have his true nickname. Or maybe “Baghdad Bob” would be better.

    What’s really depressing is that I’ve been told I look a little bit like him.

  19. John commented on Aug 15

    Barry: You put your finger on exactly what has happened over the past seven years. In broad terms real incomes for 80% of the country have either been shrinking or at best stagnant. For 20% of the country they have risen and the higher up the curve you were the better you did. Faced with shrinking real incomes the 80% decided to keep up with the Jones by taking on debt and one of the most convenient ways to do this was tapping your home equity. It actually made a lot of sense when prime was down at 1%, I did it myself, it was cheap money, but for most people in the 80% who didn’t have the option of paying it off when rates started to climb, they are left with the debt which has been spent on cars, flat screen tv’s, new patios and all the other things the Jones’ splash out on. While this was going on all the usual suspects were dismissing lagging incomes during the Bush admin by hyping family net worth based on bubble based real estate and equity valuations and it was only a matter of time before the 80% got the benefit of the trickle down. You know the story.

  20. TDL commented on Aug 15

    I think it should also be important to note that the weakest post WWII economic expansion (or inflationary bubble) was also a period with the lowest savings rate…
    But I guess the savings rate doesn’t merit any comment nowadays.


  21. Mr. Obvious commented on Aug 15

    As I recall, Louis Gave, in the latest book from Gave-Kal, attributes the behavior to lower volatility in general, which encouraged riskier behavior, such as jacking up debt.

  22. Scott in Chicago commented on Aug 15

    The embracing of debt, the sense that debt and even bankruptcy are just fine, not an embarrassment and just a lovely fact of life can be traced back to the shifting economic policy on a national level that took place under Reagan. Bush the senior called it voodoo economics. Supply side is a scam; the architecture of a house of cards. Once Reagan ran up the biggest debt of all time ( to that point) and made no effort to pay it off the view of debt by individuals began to change. Though most folks never came to the obvious conclusion that a government can foment growth easily by pouring borrowed money into the system. Until those chickens inevitably come home to roost, of course. The ginned up growth euphoria created an environment of unbridled borrowing with its inherent crash and burn and bubble consequences. This is a classic Milton Friedman gutting of an economy, of the middle to benefit the top. I’d point out that this ongoing “joy of debt,” was articulated by Cheney not so long ago when he stated, “Reagan proved (frikkin’ proved mind you) that debt doesn’t matter.” Nice, huh? This has been a top down, ok, trickle down, effort to suck the wealth out of individuals by gutting the equity of their homes to the benefit of a relative handfull. The party of family values and the like has pushed policies that have caused so much harm to those families they claim to value that the hypocracy fairly oozes.
    “We have met the enemy and he is us.” Pogo

  23. Sinomania! commented on Aug 15

    “the borrowing of last resort, to be avoided by all but people in dire financial straits” — What generation are we talking about here? Maybe the folks who survived the Depression but as the chart shows home equity has declined and been used “productively” (isn’t consumerism supposed to drive our engine?) starting back in the mid 60s. When I was in college in the 80s everyone’s parents were using home equity for college, trips, remodels, etc., although the $ amounts were a lot lower.

    What Damian said – exactly! Junk mail offers all over and the ads still running on TV here in SAn Diego of all places.

  24. That Guy commented on Aug 15

    Quote from BR:
    “The one thing I haven’t really seen explored in this series has been the reasons why the sudden embracing of debt took place.”

    I don’t think it was sudden at all. It occurs to me that this trend has been going on a long time. I was recently watching “Finian’s Rainbow” (don’t ask why, it’s far to long a story) from 1968. It was about an Irish immigrant who takes up with some depression era sharecroppers. The Irish guy brings with him a pot of gold with some hare-brained scheme about burying it in order to get more money. Anyhow, some banker types find out about it and offer the sharecroppers a line of credit since they are in possession of such assets. At first they sharecroppers are all excited about the idea of gold on their property, but then they are interrupted by the ringleader and told that what they have is better than gold! They have credit!! A song ensues while the collective run into their homes grab all their old stuff and throw it into a huge heap outside. They don’t need it anymore, they’ve got credit and they’re going to buy all new stuff!

    My jaw hit the floor. It seemed so relevant to where we are today, I couldn’t believe it. It looked like straight consumerism propaganda. Whatever started us down this path, I can tell you it wasn’t sudden.

    This should in no way be construed as an endorsement of the movie Finian’s Rainbow. It is godawful and only an MST3K junkie would be able to enjoy such an abomination.

  25. kurt milne commented on Aug 15

    Hypothesis – new variable is that people realize that wages are stagnant. They turn to equity extraction because they don’t believe that they will have opportunity to get ahead on a monthly income/expense basis.

  26. Steve Barry commented on Aug 15

    That Guy,

    I agree with your point…why does Barry think it was a sudden embrace of debt? I have posted the debt/GDP chart here about a dozen times. This started really in the 50s and took off in the early 90s. The chart at top of this entry shows it has been going on since 1955. What IS sudden is the pop of the bubble…but all bubbles pop suddenly. BTW…news the following will NOT help. Is it coincidence that it comes at a time of economic turmoil, or is it all connected geo-pol-economically?

    Russia: Poland risks attack because of US missiles By JIM HEINTZ, Associated Press Writer
    2 hours, 17 minutes ago

    MOSCOW – A top Russian general said Friday that Poland’s agreement to accept a U.S. missile interceptor base exposes the ex-communist nation to attack, possibly by nuclear weapons, the Interfax news agency reported.

    The statement by Gen. Anatoly Nogovitsyn is the strongest threat that Russia has issued against the plans to put missile defense elements in former Soviet satellite nations.

    Poland and the United States on Thursday signed a deal for Poland to accept a missile interceptor base as part of a system the United States says is aimed at blocking attacks by rogue nations. Moscow, however, feels it is aimed at Russia’s missile force.

  27. p.a. commented on Aug 15

    If I remember the numbers correctly, over the last 30 years (approx.) for the first time in American history US wage increases haven’t kept pace with productivity increases. That money went somewhere. Wonder where.

  28. Tomm commented on Aug 15

    The origin of the explosion in home equity borrowing was the change in the law eliminating tax deductibility of interest on all forms of unsecured consumer loans, except for second mortgages. The cost of home equity loans are subsidized and all other forms of discretionary consumer borrowing are not. It’s no wonder that people responded. Bad policy yields predictable results.

  29. Mary commented on Aug 15

    That Guy & Sinomania,

    My thoughts exactly. I remember when credit cards came into existence in the sixties. Everyone in our house got one from our local bank and the ages of my siblings and I were 14, 12, 9 & 4. My father took them and threw them out.

    I think the bankers thought then that the propaganda would be that incomes always go up, so live it up today and pay it back when you are making more.

    IMHP,HELOCs were to securitize the former stupid mistake as incomes were never going to keep pace. How many times have you seen the commercials to get a HELOC to pay off your credit card debt AND REDUCE YOUR MOUTHLY PAYMENTS!

    The fix has been in so long, maybe as a pay back for the NEW DEAL. I don’t know, but IMHO, the AMTax has been another scam that has deeply hurt the middle class.

  30. John commented on Aug 15

    We’re talking about this generation. You need to take a second look at the chart. As recently as the early eighties equity to debt was in the low 70’s, in fact the chart shows it increasing marginally in the preceding twenty years. The slide started, as someone else has pointed out when the Reagan administration started implementing supply side, although who knows whether this created a generalized climate of financial profligacy, and has continued ever since with some levelling off in the late nineties when real incomes for all were increasing. It’s now in the mid forties. Home equity leveraging is a a neat way for the vast majority to live beyond their means and thereby fund unsustainable levels of consumer expenditure. There’s an interesting article in today’s WSJ about the level of car sales over the past eight years which have been running at around 17 million units but have collapsed to a likely rate of around 12.5 million this year. Toyota’s US chief expect them to recover but believes it could take as much as ten years when the population will have increased by about 35 million. It says it all.

  31. Elvis commented on Aug 15

    Being 35, I can honestly say that the frenzy during bubbles is disastrous to having any level headed financial frame of reference. Boom, Bust, Boom (a few years later), Outpaced Exec. Salaries, Internet Billionaires, cheap credit and heavily marketed excess have all played a part in this and we have mortgaged our country’s future for it. Consumption is all that my generation has ever known, from being kids who beg for toys, to becoming adults who buy houses. Expensive schools, cars, houses, 2nd homes, 2.2 Kids, overseas trips, clothes, all available to keep up with the Jones’s at the cost of a signature ( No money down, 0% financing, etc.. etc.) Everybody was doing it and making money (real or not) on both ends.

    My age group has no idea what it is to be frugal. We we will learn the hard way and make up for the past in the trying years ahead.

    The real core of the problem is our elders not being involved in our lives and/or our not listening. TV, is much cooler than listening to ‘Old People’. If we had closer knit communities, and kept the knowledge of our past in our frontal lobe, we might have avoided this.

    I miss my Grandfather dearly.

  32. Annette commented on Aug 15

    Why the embracing of debt? A great many reasons, some of which you already point out.

    Two more I would like to add: tax deductibility of (consumer) credit interest was eliminated with the tax reform act of 1986, if I recall correctly. That’s the time banks started advertising equity lines of credit to replace credit card debt in a big way.

    The second reason that has been a nagging thought is that money has become so “virtual”. Debit cards, credit cards, direct deposits, pay online. Brokerage accounts online, internet banking.

    Tax payments, social sec. taxes, deductions for 401k, everything is done “automatically”. If you are self-employed and pay your taxes every quarter, and write out & sign the check to the IRS, it is a totally different experience! Coming back to the “virtual money” theme — it’s been virtual for a great many years.

    Virtual money combined with lack of personal responsibility are a toxic brew, as we are finally realizing.

  33. Scott in Chicago commented on Aug 15

    I’m not as old as your granddad, but I am a mid-boomer (53 yrs.) and have lived through most everything about which I post. May I offer this: your elders probably are boring, and our generation and our parents are the ones that voted the folks in that implemented the policies now squeazing us all. Americans get the leaders they deserve, it has been said. We boomers are the generation that has not saved nearly enough and will continue to drain resources for decades and on your dime. Both the boomers and WWII generation are the generations that refuse to give up one iota of what we see as our entitlements, regardless of the effects said entitlements will have on our kids and their kids. As a case in point: John McCain, whose wife is worth ove $100million, collects his Social Security. Why? He’s entitled damn it. Elvis, you inherited this bullshit from two very selfish generations. Sorry, homes.

  34. aaron commented on Aug 15

    Do you think these numbers are a bit off since we just had a housing boom that allowed piggyback loans to purchase a house. That is the main reason why this is up in my eyes. We were giving people the 20% down payment in an equity loan to avoid PMI. If we kept to normal lending guidelines, anything less than 20% down is to have PMI then this number would still be bad but not as bad as your showing in your article.

  35. Jeff commented on Aug 15

    Scott in Chicago: You’re probably somewhat right about the boomer generation being “selfish”, but the WWII generation? One could argue that this generation as a whole sacrificed far more (and were far less materialistic) than any other generation this century in the name of protecting this country and building a solid middle class. I think you’re way off base calling that generaton “boring” and “selfish”. If only like other cultures, ours valued the wisdom of our elders, we’d probably be in better shape as a country these days. The boomers are a different story, however.

  36. Scott in Chicago commented on Aug 15

    I knew someone would go Brokaw on that call, but I stand by it. For all the romance, the WWII generation has been AARP solid in demanding more and more. If the argument is that they earned it through the sacrifices made during the WWII era I can buy into that a bit. I am not, however, one who is mystified or awed by that generation. It is still an unwavering sense of entitlement that has carried the day. The written word being what it is, I was attempting tongue in cheek re: the boring comment, as all older generations are boring to the younger in our culture. My bad for poor writing. I agree that our and all societies can benefit from listening to and respecting those who came before. Enjoy the weekend.

  37. John commented on Aug 15

    Scott in Chicago:

    ” the WWII generation has been AARP solid in demanding more and more.”

    Their “demands” don’t seem awfully out of line with the benefits granted to seniors in just about every other civilized Western society. In many ways they are inferior. Of course if you’d like to return to the situation pre 1932 when elderly poverty was an extreme problem that’s fine. Many of course think that how the elderly are treated is mark of a civilized society.

  38. Jeff commented on Aug 15

    Scott in Chicago: Not “going Brokaw” on you but merely pointing out that WWII generation is far less selfish than any that have come after it.

    After all, people today don’t even want to pay for the current entitlements or wars that are going on right now (e.g. through higher taxes on those whose interests are theoretically being protected by military spending), but are basically just kicking the can forward to other generations. How “selfish” is that?

    Have a good weekend.

  39. Scott in Chicago commented on Aug 15

    I am humbled and I concede the point as you have just stated it. Nice to chat with you. And as I shuffle off to a dark corner, slumped over and defeated, I reiterate my happy weekend wish to you, and thank you for yours to me ;) Have a good one.

  40. Winston Munn commented on Aug 15

    “My own view has to do with the aberrant nature of this economic cycle. Instead of being employment and wage gain driven, causing a virtuous cycle of hiring, spending, and capex, and more consumer spending, it was backwards, unusually dependent upon ultra-low interest rates, housing and asset appreciation.”

    In other words – a bubble.

  41. old-fashioned fuddyDuddy commented on Aug 15

    stupid dope i was… buying a $16K daily- driver car new when i Could have “sucked the equity out of my home” (that expression makes my skin crawl) and bought a $40K car, an RV, blah blah blah.

    a few months ago, i sat in on a library lecture about preventing foreclosure (my house was paid off years ago and never HELOCed… i had other reasons for attending – to get info on other activities of the lecturing organization).

    i walk outside and what do i see ? one of the attendees gets into an ’08 Lincoln Navigator. And THESE are the people the housing bill is supposed to help ?


  42. Amateur commented on Aug 16

    You wonder about “the reasons why the sudden embracing of debt took place”?

    Well, one stands out ; NEGATIVE REAL INTEREST RATES.
    Liquidity holders become desperate, buy any available paper, and when good paper is priced to negative yields, buy junk too, until junk is also overpriced to rates much lower than their risk would deserve..

    Once low quality debtors can borrow cheap, of course then do borrow, as much as they can get. By definition, the are cash thirsty.

  43. DeDude commented on Aug 16

    Sorry but the WWII generation was the one that passively stod by and actively voted into office the neo-con-men that from Reagan to Bush II have destroyed the future for our young people. They mostly did it for something as deplorable as thinking that they had “earned” the right to charge their government expenses to a credit card in their childrens name. Nobody ever earns that right no matter how much they sacrifice.

  44. Thomas Shaw commented on Aug 17

    The debt burdoned are on full display on CNBCs new show with Carmen Wong Ulrich.

    Perosnally, I have a lot of debt but this is the decision I made and there’s a rationale behind it.

    The people on this new show however, have taken on tons of debt and scarcely feel responsible for it. They featured a nursing grad whom, boo-hoo-hoo wad $10s of thousands in education debt.

    Well, dumbass, what do you want? a $60,000 a year job and to be debt free at age 25? It doesn’t work like that!

  45. Scott in Chicago commented on Aug 17

    Amateur states:Sorry but the WWII generation was the one that passively stod by and actively voted into office the neo-con-men that from Reagan to Bush II have destroyed the future for our young people. They mostly did it for something as deplorable as thinking that they had “earned” the right to charge their government expenses to a credit card in their childrens name. Nobody ever earns that right no matter how much they sacrifice”

    Thanks. That was the point I was trying to make initially and lost my articu-lamation abilities, half my mind, but none of my $$. The WWII folk are the ones that voted the neocons in, and will perhaps vote that youngster McCain in as well. What a clusterf*ck disaster that would be…

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