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March 04, 2003

Housing Pops- So Does the Economy?

Read this to have bad dreams about the economy. A big question has been why, despite the stock market collapse, rising unemployment and general economic trauma, growth has still sputtered along.

The answer is last year's rising housing prices and cashing out of equity in homes. But that may be ending. And if you understand how important that was for the economy, the end of the housing bubble could mean depression. See here:

[In 2002] households "'cashed out' almost $200 billion of accumulated home equity," Greenspan tells us. How important a sum is this in the context of the U.S. economy? Think of the mammoth Bush stimulus plan of close to $700 billion -- over 10 years. In one year, home equity refinancing has offered almost three years' worth of the sum involved in the new stimulus plan...

"An even greater support to the economy," in Greenspan's words, was "the extraction of home equity associated with a record 6.4 million existing home sales, including condos, at record prices" -- in other words, the capital gains to those (fortunate) people who sold property at the current oh-so-high prices, gains paid for, of course, by the soaring debt taken out by the (unfortunate) purchasers...

The Fed estimates that mortgage originations for existing home purchase "topped $600 billion," so that, subtracting the homesellers' repayments of remaining debt on outstanding mortgages, the Fed judges that there was "a net increase of approximately $350 billion in debt on the homes that turned over last year."

And there is a third leg to the money from housing boom. Home equity financing -- loans for purposes other than house buying but backed by property equity -- amounted to approximately $130 billion, "also a record," Greenspan tells us.

Putting the three elements together, Greenspan said the Fed calculates that "the amount of previously built-up equity extracted from owner-occupied homes last year, net of fees and taxes, totaled $700 billion ... or more than 10 percent of estimated equity at the beginning of the year."

This sum is enormous, as large as Bush's 10-year stimulus plan -- and all of it entering the economy in one year.

Repeat-- an additional $700 billion pumped into the economy last year. And it still just limped along.

Subtract the housing bubble and add in Iraq and this year could be an unimaginable disaster for the economy.

Posted by Nathan at March 4, 2003 11:02 PM

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