“I really appreciate the idea that you would consider other views. (I don’t see a lot of liberal/progressives who will even read anything that doesn’t comport with their “worldview”. In other words, they are anti the scientific method.)…

…Here is a little more from the Federal Reserve’s B.101 (“U.S. Household’s Balance Sheet”) to make my point.

On the email I sent yesterday for 12/31/06 (near the peak of the housing bubble, pre-crisis) Nominal Household total assets were $79,761.1 billion, nominal household real estate (homes) was $22,541.0 billion, there were about 110.8 million households at the end of 2006, a homeownership rate about 69%, so 76.45 million homeowner households. Making the average nominal price of a home $294,846 and the average total assets per household $719,866.

As of 12/31/14 (post bubble, 8 years later with low nominal inflation over those years), Nominal Household total assets are now a record $97,066.7 billion, nominal household real estate (homes) was $20,632.6 billion (still below 2006, but close to the peak), there were 115.2 million households ($842,593 in total average assets per household) at the end of 2014, 74.6 million homeowner households, for a 64.7% homeownership rate. Making the average nominal price of a home $276,576.

Using Money Chimps calculator, average total nominal household assets per household grew at a CAGR of 1.99% per year over the last 8 years and average home prices per homeowner household fell at a CAGR of -0.80% per year over the last 8 years. This is because of the housing bust. If you exclude houses, the 8 year CAGR of other assets (stocks, bonds, etc.) is 3.18%….in the weakest post-recession since the Great Depression.

And here is another point I would make. The idea that consumer had to deleverage as a group. At December 31 1990, home equity was 63.4% and home mortgage debt was 36.6% of home’s value. At December 31, 2006 (at the bubble peak), home equity was 56% and mortgage debt was 44%. Today, at December 31, 2014, home equity is 54.5% and mortgage debt was 45.5%…not much different than the peak of the bubble.

And as a group (and on average including Bill Gates types), in 1990 households had a debt to equity ratio of 0.17:1 (including mortgage debt). In 2006, at the peak of the bubble it was just 0.20:1. And today it stands at 0.17:1. Those are preposterously low debt to equity ratios when compared to the corporate sector and consumers as a group are much stronger and more diverse and stable in every respect, including economically than any corporation or entity. (Now clearly this excludes government debts and off-balance sheet obligations, but it also excludes all government assets, including significant intangibles.)

Bottom line, the Federal Reserve’s household balance sheets don’t show a massive nationwide housing bubble in either 2006 or today, unless all asset-types are a bubble and unless we have another bubble today (which would bode for monetary policy and the Fed being the major source of the problem). The closest big figure you get is that in 1990 nominal houses were 26.5% of household total assets, in 2006 it was 28.2%, and today in 2014 its 21.3%…..but we have about 2 million less homeowners today than did in 2006 (8 years earlier).

Maybe well above average home price growth in the 8 years leading up to the crisis that created a smaller (not massive) cumulative housing bubble….one associated with all the new, much weaker homeowner entrants (ten million or more, maybe 20 million) coming into the market as a result of government housing policies that encouraged this and encouraged the massive buildup of MTNs (nonprime loans which Fannie, Freddie and Ginnie held 75% and the private sector held 25%)…..and this smaller bubble and these weak loans combined with other factors (short sellers/market manipulators coordinating negative bets, mark to market accounting of securities, regulatory failures, ability to walk from homes without recourse, bk, or tax consequences, etc.) to drive nominal home prices (and other assets) temporarily far lower than their long-term fair value.

That seems more likely doesn’t it? As I don’t really see in the Fed’s balance sheet of households a massive housing bubble or deleveraging by consumers. In fact, for four straight years now total household debt including mortgages has been growing.

(Mike Perry’s April 8, 2015, 2nd email to Peter J. Wallison of the American Enterprise Institute and the author of the book, “Hidden in Plain Sight: What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again”)

Posted on April 8, 2015, in Postings. Bookmark the permalink. Leave a comment.

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