The National Association of Securities Dealers (NASD) is shocked, shocked because -- in the words of a recent financial headline -- some people are "Betting the House on the Stock Market."
Homeowners are "pulling money out of their property at a greater rate than ever," and now that the toothpaste is out of the tube, someone thinks somebody needs to do something. "The consequences of this problem can be so devastating," said an NASD official, "that we'd really like to address this to keep it from becoming a big problem."
Sheesh -- what a nag. Don't they know that debt is only a tool that allows money to flow from home equity into the equity market? Who's to say which sort of "equity" is better anyway?
And the really bizarre thing is, the NASD's warning is based on data more than two years old: "From 2001 through the first half of 2002, 11% of total funds obtained from mortgage refinancings were used for stock-market and other financial investments." The fact is, the toothpaste came out of the tube slowly back then; these days it's a gush. According to data on the Federal Reserve's web site, revolving home equity loans stood at $211.1 billion on Dec. 4, 2002. As of Dec. 29, 2004, the figure is an all-time record $399.7.
In truth, no one should be surprised that Mr. & Mrs. Homeowner are cashing out their equity to purchase stocks. They've cashed out to make purchases of every other kind, and the economic powers-that-be proclaimed that, "It is good."
"According to survey data, roughly half of equity extractions are allocated to the combination of personal consumption expenditures and outlays on home modernization.... the extraction of equity from homes has been a significant support to consumption during a period when other asset prices were declining sharply. Were it not for this phenomenon, economic activity would have been notably weaker in the wake of the decline in the value of household financial assets."
For the record, this was Mr. Alan Greenspan's testimony to Congress in 2003. Refinancing is good; cashing out is better; new stuff from the mall is better still. Within this progression, is buying stocks really so outlandish?
Housing and home equity have been the performance-enhancing drug that pumped up the U.S. economy for several years now.
Most conventional economists have said that "consumer spending" played this role, but you don't have to dig very deeply to see the facts. Nearly $400 billion in home equity was "cashed out" -- converted into debt -- and homeowners in turn put it into the stock market or spent at the mall.
What does it mean?
A strong hint of an answer comes if you consider housing starts and GDP growth: In Q2 of 2004, for example, GDP was 3.3%. Yet if you remove the "residential home construction" component from that figure, GDP falls to 2.44% -- and this no exception. Home construction played this role in quarterly GDP growth for several years, but a strong hint of trouble in paradise did appear in the Q3 2004 data; GDP came in at 3.9%, and would only have fallen to 3.8% without home construction.
This brings us to the most recent housing starts figure, which for November 2004 showed the largest one-month drop since 1994.
How long can millions of people use debt to finance speculation? History doesn't offer a clear answer, since this much speculation on this great a scale is unprecedented. Still, the answer may come much sooner than anyone expected, and more quickly than most people wanted.