Dude, Where’s My Home Equity?

by Bill Bonner
by Bill Bonner

A housing market does not have to crash to cause problems. That’s the difference between a bubble in the housing market and one in stocks. Stock market bubbles are financial phenomena. Housing bubbles – at least, those in the Anglo-Saxon countries – are economic phenomena. What’s the difference? In the first, when the bubble comes to an end, the people who get hurt are investors who should have known better. Who cares about them? Typically, somebody blows his brains out and blames it on falling stock prices. But the rest of the world goes about its business.

But when a housing bubble ends, the whole economy suffers, because ordinary working stiffs have come to rely on increases in house prices just to pay the bills. When the "equity" stops coming, they have to cut back. Soon, the economy is in a slump.

Housing prices took off in the Netherlands between ’97 and 2000.

Thereafter, they did not crash; they just stopped rising so fast. The Dutch economy had become "hostage to the housing market," say analysts. When housing cooled off, so did the economy, which has been in a slump for the last five years.

"People don’t feel that they are automatically getting richer any more," ABN AMRO economist Charles Kalshoven said.

"House prices tend to stimulate consumer spending so much that just removing that stimulus tends to lead to a sharp deceleration of consumption," Fortis economist Nick Kounis added. "For the housing market to start being a drag on consumer spending, you just need it to stop providing a boost."

People stop taking out equity when there is no equity to take out. Last year, homeowners took out more in phony equity than they got from pay increases. Without the $700 billion of extra spending, the U.S. economy would have been in a slump, too.

Most people cringe at the thought of recession, but a recession in America would be an improvement. As it is, the national economy is like a man with a serious mental problem. He needs to straighten out. But Dr. Greenspan and the other quacks in charge of the economic policy encourage his delusions with soothing words and easy money. Now, every day that goes by, the poor man is in worse shape. His debt increases; his wealth decreases. His ability to function declines.

Say Fed governors: "See, I told you we could prevent a slump!"

America’s GDP is positive – despite the fact that people get poorer. Inflation is not a problem – despite $60 oil and housing costs rising at 10% per year. Housing prices are "solid" say economists, despite the fact that few people can afford to pay them. Americans are getting wealthier, they add, despite the fact that people don’t really earn more money.

And in the financial markets, rarely have we seen so many people so sure that nothing can go wrong. No one is buying puts. Inflation-adjusted Treasuries earn almost as much as those without the protection. Mortgage lenders hand out money to bad credit risks with no apparent concern about getting it back. Not since 1914 has the average man been so confident... and never before has he been so confident with so little reason to be.

In 1914, Americans had the confidence of youth – the United States had become the world’s biggest economy in 1910; it was still growing fast and on its way to becoming the worlds only superpower... and its only true empire. Now, the empire seems to have peaked out. America is on the losing end of the imperial trade – it pays the costs of maintaining open, globalized markets. But it loses money every day. Still, Americans have not quite caught on. As long as housing prices are rising, they figure they are on top of the world. They are still confident, but it is the confidence of an old fellow who has lost his grip and his wits.

July 19, 2005

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21^st Century.

Copyright © 2005 Bill Bonner

Bill Bonner Archives