Thursday, March 17, 2005

Formula puts price on greed (and a looming U.S housing crash)

Author: Danielle DiMartino

Danielle DiMartino Formula puts price on greed 09:00 PM CST on Wednesday, March 16, 2005

In the late 1990s, greed went to work in Internet stocks. Today, it's working on your home.

Prices rising irrationally, buyers with unreasonable profit expectations, investors swarming to the party – it's pump-and-dump all over again.

The pumping is proved by home prices that are through the roof. The dumping has been harder to quantify – until now.

In all, sellers and owners cashed in $640 billion of the nation's home equity in 2004, up from 2003's $528 billion.

If this number seems wholly unfamiliar, it's because it's calculated only by Goldman Sachs senior economist Jan Hatzius.

The formula

His creation – mortgage equity withdrawal, or MEW – is "the flow of new borrowing secured on existing homes." Reflecting both pump and dump, it's a factor of three data points.

First, Freddie Mac reports cash-out refinancings. After peaking at $224 billion in 2003, cash taken from homes fell back to $181 billion last year.

Last week's Federal Reserve flow-of-funds report provides the second piece of the puzzle – home-equity borrowing. At nearly $200 billion, such borrowing has doubled in the space of a year, tripled since 2002 and grown by eight times since 2001.

The third component of Mr. Hatzius' MEW is more complex – and clever. He starts with total mortgage borrowing. Then he subtracts cash-out proceeds and home equity loans to get the value of borrowing by new buyers. Then he subtracts new-home financing, to focus only on existing stock.

Then he subtracts that figure from the year-earlier figure to determine sellers' gains. In the last year, proceeds from housing turnover have grown to $262 billion from $202 billion.

Finally, he adds back in annual cash-outs and home equity loans for total annual mortgage equity withdrawal. Ten years ago, MEW was $74 billion. Last year, it bulged to $640 billion.

Home liquidity

Alan Greenspan has voiced concern over the practice of home flipping. Worried about a bubble, he says houses aren't as liquid as stocks, so the selling can't be as frenzied.

Kathleen Bostjancic, senior U.S. economist at Merrill Lynch, is worried, too, but humbly begs to differ on the liquidity issue.

The National Association of Realtors recently reported that in 2004, 23 percent of home buyers were investors.

Ms. Bostjancic: "The argument Greenspan uses – that houses aren't like stocks – well, that doesn't hold if one in every four homes is being purchased as an investment."


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