Home Equity Frenzy !

Friday, August 15, 2008 | 09:55 AM

Today's must read MSM piece is a page one NYT article on how second mortgages -- "the borrowing of last resort, to be avoided by all but people in dire financial straits" -- became transformed by a ubiquitous ad campaigns into "universally accepted" forms of credit.

Home Equity Frenzy Was a Bank Ad Come True -- part of the NYT's the Debt Trap/Pulitzer bait series -- is a fascinating study in consumerism, advertising and financial ignorance (ads can be seen here).

As we noted back in March via, the Federal Reserve released data showing that, thanks to HELOCs and MEW, Household Equity was at all time lows. As the chart below shows, we crossed the 50% household equity level For the first time since World War II. In the 1980s, that figure was 70%.

Equity versus Debt
Chart via NYT Debt series


The one thing I haven't really seen explored in this series has been the reasons why the sudden embracing of debt took place.

My own view has to do with the aberrant nature of this economic cycle. Instead of being employment and wage gain driven, causing a virtuous cycle of hiring, spending, and capex, and more consumer spending, it was backwards, unusually dependent upon ultra-low interest rates, housing and asset appreciation.

Is it any surprise that the weakest post-recession economic recovery since WWII in terms of job creation and wage gains led to an enormous debt creation? People are loathe to give up their standard of living, and they will -- and did -- go deeply into debt to maintain their "lifestyles."


Federal Reserve: Household Equity at all time lows (March 06, 2008)

Home Equity Frenzy Was a Bank Ad Come True
NYT, August 14, 2008

Friday, August 15, 2008 | 09:55 AM | Permalink | Comments (45) | TrackBack (0)
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But hey, according to some "economists" and MSM pundits, if you got a new car, a flat screen tv, pool, remodeled kitchen, bathroom, and a few vacations out of it, you did very well and are much "richer" than you had been. I mean, 50-60 years ago, people didn't even have microwave ovens!.......um, not so much. until the bills come due and you gotta pay them back.

The "gains" for most people over the past 7-8 years are a complete illusion. Not real "wealth" creation, but just a period of accumulating stuff in return for putting your castle (house) in hock. Brilliant move folks.

Posted by: Jeff | Aug 15, 2008 10:04:54 AM

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