US homeowners feel the pain of lost equity.

There’s an article in todays New York Times about the way dropping home prices are affecting consumer spending – its an interesting look at the way the boom and bust cycle works on ‘positive feedback loops’ which aren’t always positive. When house prices are increasing people spend more money and will take on extra debt to buy more ‘investment’ property thereby driving high prices higher. When the peak has been hit this effect is reversed. Dropping house prices eliminate the ‘ATM effect’ of home equity withdrawals removing a large portion of discretionary spending from the economy. Less spending means less income thereby driving dropping house prices lower.

Mr. Whittey once seemed an unlikely member of that cohort. A sales manager at a flooring and tile company, he exudes the unflappable air of someone raised amid the easy money of the casino world. Until recently, he and his wife regularly embarked on shopping sprees of $1,000 and up.

He bought a 21-foot boat and two flat-screen televisions for their home. He sold his old truck and bought a new one, he said, “just ’cause I didn’t like the color.” Mr. Whittey could live in such fashion because his company was making good money and his house was appreciating.

But today, the value of his own home, which reached $500,000, has fallen and a separate investment property he bought seems likely to fetch far less than the $580,000 he owes the bank. His commissions have diminished, so his income is down. His neighbor recently fell behind on house payments, prompting the bank to foreclose. Anxiety reigns.

“We used to go out to eat three or four nights a week,” Mr. Whittey said. “Now, we don’t go out at all.”

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CBB

"There must be a force that's manipulating the increase in house prices." For real, it was probably the river of cheap money that's been flowing globally for the past few years. That's starting to dry up and we're seeing real estate price collapses everywhere as a consequence. Not here of course, nothing bad can possibly happen here.

Michael Randallbard
Drachen

Good article in Vanity Fair that goes into the roots of the current disaster.The Economic Consequences of Mr. Bush"…the job of economic stimulation fell to the Federal Reserve Board, which stepped on the accelerator in a historically unprecedented way, driving interest rates down to 1 percent. In real terms, taking inflation into account, interest rates actually dropped to negative 2 percent. The predictable result was a consumer spending spree. Looked at another way, Bush's own fiscal irresponsibility fostered irresponsibility in everyone else. Credit was shoveled out the door, and subprime mortgages were made available to anyone this side of life support. Credit-card debt mounted to a whopping $900 billion by the summer of 2007. "Qualified at birth" became the drunken slogan of the Bush era. American households took advantage of the low interest rates, signed up for new mortgages with… Read more »

jesse

Article on one of the first big Canadian banks to start seriously admitting US debt exposure. We of course assume Canadian debt has no increased default risk. Hard to say if they will become more gun shy with Canadian specific loans and if investors will flee to the perceived safety of the Canadian debt market.

trotter

"There must be a force that's manipulating the increase in house prices.".. why am I not surprised 😀

Cheeky Monk

I keep hearing Vancouver is a special case and can't compare to what's happening in other areas. It's indeed an expensive city to live in. With min wage at $8, I don't know how people can afford to live here. When the Olympics is over, we'll be in debt paying for it, realise it doesn't generate more business or tourist, and it's not a business friendly city after all. Our ferry system needs fixing, GVRD wants to hike price, so does BC Hydro and Telus. Big projects will sink us further in debt like CanadaLine, Convention Centre, Twinning Port Mann bridge, etc. There are no real sustainable growing industry that generate good paying jobs. Vancouver is not a tech hub like Silicon Valley, or a commerce hub like Toronto. Our forest industry is dying a slow death. Our beautiful mountains… Read more »

tulip-Mania2

“We used to go out to eat three or four nights a week,” Mr. Whittey said. “Now, we don’t go out at all.”Don't you just feel sorry for those poor bastards who can't get fat anymore on the next generation.

Michael Randallbard
Clarke

It is sort of amazing how people used home equity like an ATM machine, and it was in fact a major factor in US domestic spending over the last few years. Frankly, the whole thing is just so crazy. People were not getting wealthier, they were just accumulating more debt.

Michael Randallbard

Michael…..here's what they are shorting which only serves to drive it higher towards 2200.00

aetakeo

What with the expensive groceries and gas in this city, not to mention, oh, everything else, you can go into debt (or at least have slower savings) living in a RENTAL in this city. Doing groceries at the same chain I normally go to, but in a different city, was an eye opener to how much this city's costing me every month.

Patiently Waiting

Mr. Whittney had quite the party over the last few years. Now, the hangover…The sad thing about Vancouver is you get that deep in debt just living a simple life in a simple condo. Many Vancouver FBs got just the hangover, no party.

beta

My problem with any US investment is that the falling USD can quickly decimate any profits. I'm sitting out at this point.

Michael

How many of us are trying to profit from this downturn by shorting US stocks?I havn't so far, but now I feel inclined to short various bank stocks that have not taken huge hits yet. US retail stocks should also start taking hits soon as well, considering consumer spending this holiday season should be way down. When they report there Christmas sales numbers and they fall way below expecetations, retail stocks will fall. I was thinking about shorting Citigroup over a week ago, but now that doesn't seem like such a good idea considering how far its already fallen. So what are people shorting these days?

si fu

I wonder how long it will be until we see the same phenomenon here? I went to a trendy restaurant earlier in the week (a rare occurrence for my lifestyle) and the place was empty. Anecdotal evidence to be sure, but maybe an early sign of things to come…With so many urban hipsters living off credit cards and feeding mega-mortgages on little shoebox condos, even a slight economic downturn will have a big effect.