Monday, October 06, 2008

So where did all that housing money go? You already spent it

The size of the numbers is staggering -- $700 billion here, $900 billion there -- and a lot of people are wondering how it's possible that seemingly every bank and every homeowner is suddenly broke.

There have been clear signs for a while that something was amiss in the housing and consumer consumption market, and one great indicator is Mortgage Equity Withdrawal, or MEW.

This is, quite simply, the net amount of cash that people pulled out of their houses to spend on Other Stuff -- either by a home equity loan or, in the case of retirement, selling an expensive house and buying a cheaper one. The financial blog Calculated Risk reports, buried in an article about the collapse of MEW, that U.S. consumers pulled $2.7 trillion out of of their houses during the five years from 2004 through 2008:
Equity extraction was close to $700 billion per year in 2004, 2005 and 2006, before declining to $471 billion last year and will probably be less than $100 billion in 2008.
While some of that might have been spent on the houses themselves, in the sensible form of new bathrooms or additions, a lot of it was spent on questionable upgrades like granite countertops and flat-out expenditures like flat screen TVs, Hummers, and vacations to Fiji. So the reason that all those Wall Street banks are going bust? Because they thought that you -- or your neighbors -- were actually going to pay back the inflated mortgages that backed up that giant sucking sound of the home ATM in overdrive.

For those of you who protest (as I do) your innocence, realize this simple fact: Even if you didn't do such an extraction yourself, whatever business you are in benefited from the huge increase in consumer spending that this MEW generated over the past four years. Retail, manufacturing, advertising, financial services, construction... we all lived a little or a lot better.

And now, not only is it gone, but we've got to pay it back in the form of systemic collapse, higher taxes, or inflation. None of us were as wealthy as we liked to pretend over the past four years, and now we're all going to be a lot poorer than we're ready to admit.

No comments: