Mortgage Credit News – December 24, 2009

Markets quiet, it is time to look back.

One year ago, the terrible market panic post-Lehman had begun to abate, and all mice in the mortgage house eagerly awaited the Fed’s purchases of mortgages. The economy itself was still in a freefall that would not to slow until spring, and tentative recovery in early summer flattened in fall. However, flat beats panic. By a lot.

Most citizens still grope for a handle on the crisis. What had happened that made us so vulnerable? Four years ago housing began to burst its bubble. Two-and-a-half years ago, summer 2007, bad mortgage assets undercut the whole, immense pile of bad IOUs from here to Europe, firesales and credit collapse fed on each other, and financial assets throughout the West began abrupt decline.

That was and is “asset deflation” — not monetary or CPI deflation, just assets. The Fed prevented the mistakes of the ‘30s: the banking system did not close, no deposits were lost, the money supply did not decline, and consumer prices held. However, great damage was done to household net worth, unlike any downturn since the ‘30s.

Net worth is what we have after we subtract liabilities from assets. Thus asset deflation after an all-time debt party cut net worths of all kinds, and the highly leveraged saw their net worths go negative. The best detail and description of that stomach-dropping experience resides at, right-side of homepage “Z-1,” page 104, account B.100, “Balance Sheet of Households.”

Household net worth crested in 2006 at $64.5 trillion. (Those gloomy about US prospects might note. Not bad). The total diminished a bit as home values faded, but was still north of $60 trillion on the 4th of July 2008. Then through an open manhole dropped $11.5 trillion by April Fools’ Day 2009 to $48.5 trillion.

In the whole period, 2006 peak to spring ’09 bottom, household liabilities changed hardly at all, just about $14 trillion, mortgages $11 trillion of that total. Our net worth did not decline because we continued to balloon our borrowing and spend, but because our assets unwound, and the unwind centered in stocks and housing.

From 2006 to spring ’09, stocks and mutual funds held by households fell from $14.3 trillion to $8.4; the value of homes fell from $23 trillion to $15.7. Un-leveraged stocks and funds fell 41%; homes minus loans, net equity fell from $12 trillion to $4.7, a 60% collapse.

Z-1 says household stocks and funds have recovered $3.2 trillion, and total net worth is up $5 trillion since spring bottom. However, the Fed includes a $1 trillion rebound in home values, and I find that hard to believe. No, impossible.

The home-value accounts are terribly unreliable. Everybody’s estimates — Fed, Zillow, Case/Shiller, 1st American CoreLogic, RealtyTrac — are based on tweaking assessed value by estimated impact of recent sales. Notoriously inaccurate assessed values aside, recent sales reflect the values only of homes that have sold, not the many millions in “shadow inventory,” delinquent or under water. Nor the fraction fallen so far that sellers won’t try to sell, as evidenced by nationwide drop in homes listed for sale.

So, looking backward and forward… the persistence of this recession is due to the damage in home equity, our most tender spot. However, our resilience and long-term prospects show in our remaining net worth: $53.4 trillion, down only 8% from peak. A glance at the Z-1 chart of accounts shows the astounding amount of money we have stashed in various squirrel holes: pension reserves larger than all mortgages, deposits and bonds more than stocks…. May take a while, but we’ll make it.