Tuesday, January 4, 2011

Deleveraging the Housing Teeter-Totter

When I was in school, I hated teeter-totters.  Mainly because I was really small and the big kids would stick me up in the air and not let me down.  Any of you homeowners feeling the same way?  Well, a number of years later while I was studying in college, the teeter-totter came back in the form of leverage, how the use of debt could multiply the financial decisions of companies, for good or bad.  If a deal was good, it was better with leverage, if it was bad, it was worse.  How much better or worse, depended largely on where the fulcrum was placed and the fulcrum was governed by time, interest rates, and percentages of debt.

Last week or maybe two, I took a hiatus from the unpleasant to enjoy the holidays, but now we must all face the facts of the new year, there was an article on how the US economy was going to deleverage, or get rid of leveraging devices, such as loans that have proven to be magnifying the downside.

The article speculated that households would deleverage about $1 Trillion, mostly through foreclosure.  The government and media love to throw out that trillion figure, and they have to because of the size of our economy, but it is nearly impossible to put into perspective.  Most of us have never seen a million dollars in one place but a friend of mine put together a slide show of a man standing next to a pallet of brief cases as tall as the man, each case holding a million dollars.  The final slide, the man isn't even visible, and pallets fill more than a football field of space.  That is a trillion dollars.

My curiosity, in reading the article asked, how many households would have to foreclose to make that number?  Census statistics showed the following amounts for housing prices the last six years before and including the recession:

Average Housing Prices
Period Ending Median Average
Dec-03 $196,000 $253,900
Dec-04 $229,600 $284,300
Dec-05 $238,600 $290,200
Dec-06 $244,700 $301,900
Dec-07 $227,700 $284,400
Dec-08 $229,600 $263,100
Running Average $227,700 $279,633

 If we take the running average of those years as the amount of debt each household took on to purchase the home, assuming 100% financing, then it would take on the low end average, 3,576,112 houses going into foreclosure, and on the high median side, 4,391,744 houses going into foreclosure.

Those number would likely be meaningless to you as well, but if we take the Pacific Northwest consisting of Washington, Oregon, and Idaho and the 2009 housing units and ownership percentages, every homeowner in that tri-state footprint would have to foreclose their homes and we would still not make the trillion dollar mark.

Housing units Ownership Owned
Washington 2,813,372 64.6% 1,817,438
Oregon 1,638,583 64.3% 1,053,609
Idaho 647,502 72.4% 468,791

What this tells me is that we are not on an upswing as many of the trade publications would have us believe.  I believe that it was Mark Twain who said there are three kinds of lies, lies, damned lies, and statistics, and certainly we can manipulate the data or pick and choose which data we are going to look at.  However, if there is still to be over a trillion dollars of houing to be deleveraged and it would take more than every homeowner in three states to go into foreclosure, then we are looking at a lot of people up in the air on the wrong side of the teeter-totter while the bank laughs at us from below.


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