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Equity Extraction Fades, What Happens As As Home Sales Slow?

Posted By Barry Ritholtz On January 26, 2006 @ 5:05 am In Economy,Real Estate,Retail | Comments Disabled

Lots of Real Estate news recently. Let’s start with Existing Home Sales:

WSJ: [1] 

"Sales of existing homes set a record for a fifth straight year in 2005, even though theExisting_home_sales_2006_0125 [2] year ended on a weaker note with three straight monthly declines, sending another signal that the nation’s housing boom is beginning to cool.

The National Association of Realtors reported that sales of previously owned homes and condominiums dropped by 5.7% in December compared to the sales pace in November.

It marked the third consecutive monthly decline, something that has not occurred in more than three years.

Sales declined in December even as mortgage rates moved slightly
lower. The average rate on a 30-year fixed mortgage was 6.27% last month, down
from 6.33% in November, according to Freddie Mac. A survey by the Mortgage
Bankers Association showed that mortgage applications increased 7.7% last week,
but economists attributed much of that gain to seasonal factors."

Real Estate is key to the consumer economy, as the following makes all too clear. As reported in IBD last week [3]:

"Americans kept tapping the equity in their homes
at increasingly high levels through much of last year, Federal Reserve
research shows, as home sales remained strong and provided hefty
capital gains to sellers.

That’s helped lift consumer spending, letting Americans shell out more than their disposable income.

But with sales and prices slipping at the end of 2005 and
refinancing less attractive, economists have started to place bets on
when the country’s favorite piggy bank will finally start to crack. If
and when that happens, consumers may have to cut back, slowing overall
economic growth."

 

click for larger chart

Ibd_012006 [4]

The article is rich with data and analyses on the impact of Home Equity Withdrawal. Between the IBD and WSJ articles, there were some intriguing data points:

· Q3 2005 equity extractions rose 10% from previous
quarter to $990.6 billion (seasonally adjusted);
· Q2 2005 saw equity withdrawals rise 27% to an estimated $904.4
billion;
· During the first nine months of 2005 equity extraction totaled
$2.6 trillion — double withdrawals during all of 2000;
· During 2002 -2005, equity withdrawals closely tracked the home price and sale appreciation;
· Households’ real estate assets increased at annual rate
of 11% (2001 to the Q3 2005). Compare that to the 2%
average gain in financial assets, and 3% wage gain;
·Consumer spending rose 5% per year (2001-03) — despite a
recession and jobless recovery;
· Housing starts fell 8.9% in
December 05;
· Sales of existing homes fell 5.7% in December 05;
· Existing home sales fell in October and November 05;
· Mortgage
originations fell 8% in the fourth quarter vs. a year ago;
· Refinancing applications have dived 84%
from a May 2003 all-time high;

>

What’s the impact of this slowing? According to Goldman Sachs, the lower home building and lower mortgage equity
withdrawals will cut about 1.5 percentage points off GDP growth in 2H 06 or 1H 2007.

My view? I think the cut is closer to 3 percent. Without equity extraction in 2005, GDP would have been near 1% [5].

My expectations for 2006 GDP are way below Wall Street Consensus of 3.5 – 4%; For 1H, I expect a 2.5 – 3.0%  range, and for 2H, it looks more like 2-2.5% . . .

>

Sources:
Sales of Existing Homes Fell 5.7% Last Month [1]
WALL STREET JOURNAL, January 25, 2006 11:01 a.m.
http://online.wsj.com/article/SB113819995626255941.html

Home Equity Extraction Still Hot In Q3, Fueling Shopping Spree [3]

BY LAURA MANDARO

INVESTOR’S BUSINESS DAILY,  1/19/2006

http://www.investors.com/editorial/IBDArticles.asp?artsec=16&issue=20060119


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2006/01/equity-extraction-fades-what-happens-as-as-home-sales-slow/

URLs in this post:

[1] WSJ:: http://online.wsj.com/article/SB113819995626255941.html

[2] Image: http://bigpicture.typepad.com/photos/uncategorized/existing_home_sales_2006_0125.gif

[3] IBD last week: http://www.investors.com/editorial/IBDArticles.asp?artsec=16&issue=20060119

[4] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/ibd_012006.gif

[5] near 1%: http://bigpicture.typepad.com/comments/2005/12/chart_of_the_we.html

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