From: Tad Borek 
Newsgroups: misc.invest.financial-plan
Subject: Home equity & mortgage study
Date: Thu, 11 May 2006 12:10:34 -0500
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Yesterday's online WSJ had a pointer to this in-depth study by First 
American, about mortgage debt. This one goes beyond averages and shows, 
for example, the percentage of home equity for buyers with mortgages 
taken out in 1995, 2000, 2004, etc., as well as the amounts of 
adjustable debt that are festering out there (broken down by rate & year 
of origination). Lots to dig into for the housing bubble watcher (or 
skeptic) - data supporting both views:

http://www.firstamres.com/pdf/MPR_White_Paper_FINAL.pdf

The author's conclusion is that the most risk is 2004-05 buyers using 
ARMs, especially at teaser rates and those with negative-amortization 
loans. They already have minimal equity, and many will be put under high 
stress when rates adjust - some will see a doubling of payments and 
can't sell to get out unless prices rise. It's worse if the market were 
to sit still or drift downward 10%. The charts are interesting because 
you can see the % equity that would result for different buyer groups 
(year, interest rate) if prices rose or fell different percentages. It's 
the best "global" view of the mortgage market I've seen.

Now the study shows that these teaser/ARM/neg-am buyers are a small 
minority, but one open question to me is quantifying the potential 
"feedback" effects - for lack of a better word. To my knowledge there 
isn't a precedent to look at. Arguably these buyers represent the 
marginal purchasers that helped fuel unprecedented price gains (kind of 
like the guy who bought VA Linux on margin at 400X earnings). Some of 
these buyers, we know, will be forced to sell, including some 
foreclosure sales. How much inventory does it take to marginally lower 
the price, sending yet another owner into negative equity? It's a 
market-liquidity question really and to my knowledge there isn't a 
precedent to look at. The amplifying factor is that today's buyer can't 
go and borrow at 4% to sustain the high price.

Another fact cited, which to me is "burying the lead", is that the 
percentage of home equity has remained stable at about 57-58%, while 
aggregate home values rose from about $12T to over $19T over the past 
five or so years. This is pointed to as a positive sign, but I think of 
how a sizable portion of the $7T price gains seems to have vanished 
(i.e., the gains for homeowners who simply remained in a home that 
increased in value perhaps 80%, and kept paying down their mortgage) . 
The equity percentage should have risen, in the same way your capital 
gains in a stock portfolio rise when the stock market goes up.

-Tad