House ATM Creates Overleveraged Americans - The Tide is Out so Now We See It

Since the blog began, and well before then in fact I've been astounded by the use of the house ATM. I've read many stories of "serial refinancers" - people who literally were taking money out of their house yearly, as the housing prices shot up. Now living in a Midwestern industrial state it felt like I was reading about a foreign country but seeing how widespread it was, led me to the thesis that it's not solely (although many people used it this way) for people to overspend for toys. I believed many were using it to mask their lower buying power, not in any 1 year, but in aggregrate [Do the Bottom 80% of Americans Stand a Chance?] The cost of living the "American" way simply is out of touch with 3% type of wage increases most of us get. And again, in a service industry many people are being displaced from what used to be higher paying jobs into lower paying jobs. So this incremental creep has been masked by more people in the household working over the past 10-20 years (namely women), and in the past 7-8 years the use of the house ATM. Cash balances on corporate balance sheets are at their highest levels ever. Cash in the "people's" balance sheet is at its lowest. I don't blame corporations - every rule has been tilted their way of late (even regulation, where we like them "to police themselves")- they pay for elections; they are getting their rewards - the balance of favor has been tilted in their direction, so they are taking advantage of it. That's our system. And then throw the reality of global wage equalization on top of it, and it is simply stacked against the "average" US worker who has "average" skills and tries to live an "average" life like his/her parents. This is not an economy or system for them - only high achievers or people in very narrow industry/job types will do well in this type of system.

Most of these things happen over very long periods of time which is why I like to use the word erosion. In any 1 year when the cost of life goes up 5.4% and your wages go up 3.4% it doesn't mean much. You'll just charge a bit more here, take out a small loan there, etc etc. But when its chronic, and its accelerating (as inflation in things we must have (non discretionary) has the past few years), eventually you hit a wall. Combined with what is essentially a financially illiterate populace ("I didn't read the contract" <--- on that $350K mortgage), and it's just a gasoline can. This is nothing new - people have been warning around this for a long time, but as long as banks were making money and houses continues to go up in value "we all win". Until we don't. And then we are left in today's situation - which is essentially a death spiral of proposed bailouts to keep home prices inflated so more and more people are not underwater, in an inflationary environment, where the worker bees have little bargaining power in their wages (if you won't work for this wage we'll find someone else, either here or overseas).

So as Buffet says... as the tide rolls out, more and more is exposed. Since we don't have day to day "pricing" like we do in the stock market for inflation, housing prices (true prices based on the market, not "sellers wish list for a price"), etc - the true problems remain hidden, and Kool Aid toting bulls can tell us how it will all be fine "in 6 months". But the tide is beginning to roll out... and the facts are beginning to surface. Facts like this... and again, we're still in the early stages of a correction in a "non recessionary" (cough) environment. Just food for thought. Remember... 2008 - the year of the "walk away". 1in every 10 homes in America is upside down - NOW. Just wait as prices continue to falter.

• Americans' percentage of equity in their homes fell below 50 percent for the first time on record since 1945, the Federal Reserve said Thursday.
• Homeowners' portion of equity slipped to downwardly revised 49.6 percent in the second quarter of 2007, the central bank reported in its quarterly U.S. Flow of Funds Accounts, and declined further to 47.9 percent in the fourth quarter -- the third straight quarter it was under 50 percent. (look how quick the degradation is happening, 2% sequential decline in 6 months- amazing)
• That marks the first time homeowners' debt on their houses exceeds their equity since the Fed started tracking the data in 1945.
• Home equity, which is equal to the percentage of a home's market value minus mortgage-related debt, has steadily decreased even as home prices jumped earlier this decade due to a surge in cash-out refinances, home equity loans and lines of credit and an increase in 100 percent or more home financing.
• Moody's Economy.com estimates that 8.8 million homeowners, or about 10.3 percent of homes, will have zero or negative equity by the end of the month. Even more disturbing, about 13.8 million households, or 15.9 percent, will be "upside down" if prices fall 20 percent from their peak.
• The threat of so-called "mortgage walkers," or homeowners who can afford their payments but decide not to pay, also increases as home values depreciate and equity diminishes. Banks and credit-rating agencies already are seeing early evidence of this.

It *IS* the perfect storm, and yes ... it is different this time. Not just a credit crunch. Not just a (regional) recession. Not just a tapped out consumer moving desperately to his credit cards and 401k raids now that house ATM is gone. Not just inflation. But all of them. Together. Last to go will be jobs. Coming to a theater this summer.