Die US Immobilienblase ein weiterer Baustein

verfasst von nasdaq, 04.09.2002, 16:20

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By Ken Wolff
Special to TheStreet.com
09/03/2002 04:07 PM EDT

One of the best things about writing for RealMoney is the feedback I receive from you, the readers, and the opportunity to exchange ideas and learn from your often-brilliant analyses. I received a lot of really strong reactions to my recent column and poll on the housing bubble. We obviously share a lot of concerns about this issue.

So, let me address some of the most common themes that came up in the responses I received.

A Little Background

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Some of you asked why I, a stock picker, would care about any potential housing bubble. Let me share my story. Before plunging into the world of trading, I owned a manufacturing business. My business did well, but my wife and I were never particularly careful with money. We weren't frivolous spenders (most of the time), but credit cards can be so convenient, and their balances seem to build up so quickly.

A home equity loan at a lower adjustable rate seemed like a perfect opportunity to lower those payments and turn over a new leaf. The bank sent an appraiser, who was very generous, as they always seem to be in these cases. The plan would've worked if we hadn't started using the cards again. But you know how things go.

During a divorce, I was floored to learn the extent of our debt. After all was said and done, we owed a lot more for the house than it was worth on the open market -- on top of credit card debt. After a fire, I lost my business and my means of paying this overinflated mortgage. I learned some lessons there, and it all worked out in the end, because I became much more successful at trading than I ever was in my business. But that came only after a great deal of pain. I had to start over at a relatively late stage of life.

I share this with you because I see in the statistics that I'm far from alone. The real story here, I think, is not really a housing bubble, but rather the alarming amount of consumer debt. According to Freddie Mac, home equity value grew by $500 billion last year. More than $140 billion of that, however, was promptly taken out in cash-out refinancing, and that trend is expected to continue.

Road to Debt Paved With Good Intentions

I'm sure that most of the people who took out that equity had good intentions. Many of them probably paid off their credit cards, like I did. Many of them sent their kids to college with that money, like I did. But how many cut up their credit cards afterward? Eighty percent of American households have credit cards and carry an average balance of $7,000. Last year, Americans put $400 billion on their credit cards and paid $50 billion in finance charges.

And we aren't getting any richer. According to the American Enterprise Institute, household net worth dropped from $43 trillion in 2000 to around $36 trillion in mid-2002. That reduction of wealth includes the appreciation of real estate values. The number of personal bankruptcy cases filed in the federal courts broke records in June 2002. We also aren't seeing new jobs being created. I don't want to seem like a pessimist, and I do believe in the strength and ingenuity of the American people, but we can't ignore red flags when we see them.

Consumer spending has continued to be strong despite rising unemployment and this reduction of overall wealth. Does that mean, then, that much of the spending is being paid with debt at the expense of our future? If so, and it certainly seems to be the case, then we need the lending machine to keep rolling until the economy can pick itself back up. Otherwise, we'll be in even bigger trouble if demand decreases further, forcing corporate profits down and unemployment up. It's a vicious circle.

So what do we do with this information? Yes, it's true that a direct comparison between the Nasdaq bubble and the housing boom is a big stretch. We don't trade our homes -- we live in them, and they're nowhere near as liquid as stocks.

As I mentioned last week, the housing boom is very localized. Real estate markets vary from city to city, and even from block to block. So housing prices are not likely to crash as dramatically and quickly as the Nasdaq did.

However, I do see a common thread in many cases: the theme of excess. Maybe it's human nature, but I believe we tend to live for today and let tomorrow take care of itself. That's why most of us are, statistically speaking, not prepared for retirement. That's why we're buying wide-screen TVs with our home equity. That's why many of us are getting in over our heads with mortgages that are eating up 45% of our income, and two new cars in the garage, as we try to keep up appearances of success and keep up with the Joneses. For me, that kind of thinking has often led to decisions I wish I could take back.

Simply be aware, and take care that you do not become part of those vicious statistics. Don't sell your home in a panic and live in a rental. But do limit your debt and lifestyle to what you can truly and comfortably afford. It may seem old-fashioned and simplistic, but I wish I had taken it to heart years ago.

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• Die US Immobilienblase ein weiterer Baustein - nasdaq, 04.09.2002, 16:20