Scary Numbers

Barron's had an article about the housing market's threat to equities that was very dour. I don't write a lot about housing and I write even less about housing stocks. This has been a blind spot for me as I have trouble seeing how there can be endless demand for new houses. Perhaps the trading in the housing stocks is telling us the demand is not endless.

According to the article there are $2.7 trillion worth of adjustable mortgages that will reset in 2006 and 2007. A $250,000 note, again per the article, could have a monthly payment today of $1123. After the first reset that payment could be $1419 and after the second reset the payment could jump up to $1748. For the person who needed that $1123, either larger number could be a budget buster.

Here are some other numbers;
• 32.6% of new mortgages and home-equity loans in 2005 were interest only, up from 0.6% in 2000

• 43% of first-time home buyers in 2005 put no money down

• 15.2% of 2005 buyers owe at least 10% more than their home is worth

• 10% of all home owners with mortgages have no equity in their homes

A fairly obvious point here would be that this stuff only hurts people who are over-leveraged. Too much leverage is always a big danger. $1748 may not seem like a lot but to a couple where both workers make close to $30,000, the extra $625 is a big bite out of their take home pay.

The bullet points above about home equity raise concerns about home equity loans. We all see the myriad of TV commercials offering equity loans. Many consumers have taken out equity and spent it. Spending on home improvements would be the most benign use of equity and I suppose a new flat panel TV and a trip to Aruba would be the most wasteful use of equity.

I am hard pressed to think that the housing market can crash in the way we think of equity market crashes but I do think dislocations that originate due to housing related issues that hurt the consumer could impact all capital markets and housing prices. I'm sure data could be found to support the idea that residential prices are a little softer than a few months ago. I don't think an average 10% decline (I am not saying all prices would do the same thing, just saying an average) would be a deathblow but some sort of domino effect where higher rates lift mortgages which hurts consumer spending yada yada and the stock market has a new and obvious headwind.

I don't think there will be an extreme outcome from this for reasons I have written about before; calamitous crashes just do not happen very often and we already had one this decade. I certainly hope that holds up.