Issue 9- November 14, 2003

In this week’s newsletter we examine the trends in the US Housing market.

The Increasing Importance of Housing

Much of the skepticism surrounding the sustainability of our economy is predicated on the belief that consumer’s debt burdens are now sufficiently onerous as to demand a dramatic retrenchment in their spending. Not so fast. There is definitely more to this story and it has everything to do with housing. Over 70% of that household debt now comes in the form of home mortgages, and those debts have largely been locked in with modern day, low interest rates. Interestingly, the importance of housing goes well beyond the consumer. Real Estate loans, as a percentage of bank loans, have now grown to over 50% from 42% in just the past 8 years. But it is the federal government who has put the most stock in housing. The mortgage backed securities (MBS) market is now 50% larger then all of the US Treasury issuance combined. Consider that as recently as 1995; the MBS market was 12% smaller than the entire Treasury market. It is fair to say then that housing finance now plays the dominant role in our financial system and any thoughtful analysis of consumer finances will need to be researched in this context.

Rising Debt and Equity Levels

One of the favorite statistics of the gloom and doom crowd is to point out that household debt as a percentage of personal disposable income now exceeds 110%. While startling, this just speaks to one side of a consumer’s balance sheet. Home ownership is now fast approaching 70% and home owner’s equity as a percentage of personal disposable income now exceeds 95%.

Another favorite statistic is to show that home owner’s equity as a percentage of their real estate has been steadily declining. But again, this paints just half of the picture. If in 1980, you owned a home that was worth $100,000 and your equity was 68%, then your equity was worth $68,000. Now in 2003, let’s say that same home was worth $157,000 which assumes just 2% annual growth, and your equity percentage had “declined” to 55%, your equity would now be worth $86,000! It would be hard to argue that they are substantially worse off.

Certainly consumers are running larger balance sheets than ever before and that has inherent risks associated with it. But, they have not taken on all this debt without some commensurate increase in their overall equity, which has largely come in the form of their home equity.

In this Edition

  • The increasing importance of housing
  • Rising debt and equity levels

Huntington Steele

925 4th Avenue
Suite 3700
Seattle, WA 98104



Past Issues
8- 10.31.03
3rd Quarter GDP

7- 10.15.03
Private Equity

6- 10.02.03
Stimulus/Bear's Last
"At Bat"

5- 09.15.03
Hedge Funds

4- 09.03.03
Econ Highlights/Bluetooth

3- 08.15.03
Tirade on Bonds/ Modern Portfolio Theory

2- 08.01.03
Econ Data/Asset Allocation

1- 07.15.03
Economy/Rates & Currencies

“Consumer short term debt….is approaching a historical turning point. Having risen at an abnormally fast rate for ten years, it must soon adjust itself to the nation’s capacity for going into hock…which is not limitless. Whether the rate of growth in consumer debt will slow down is no longer in question…it must slow down.” Fortune Magazine, March 1956

“Federal Reserve Chairman G. William Miller said the average American buyer is getting dangerously deep in debt, and warned that the trend could have serious consequences… Several of the nation’s business leaders said they share Miller’s alarm over the level to which consumer debts have climbed.” Washington Post, October 1978


Market Highlights



9/30/03 6/30/03 3/31/03 12/31/02
DJIA US 9837.94 9275.06 8985.44 7992.13 8341.63
S&P 500 US 1058.41 995.97 974.5 848.18 879.82
Nasdaq US 1967.35 1786.94 1622.80 1341.17 1335.51
EAFE Int'l Equity 1174.33 1103.39 1025.74 868.55 952.65
5 Yr Treasury 3.298 2.865 2.41 2.71 2.74
5 Yr AAA Muni 2.53 2.300 2.17 2.50 2.59
10 Yr Treasury 4.221 3.932 3.52 3.80 3.82
10 Yr AAA Muni 3.81 3.670 3.30 3.75 3.72
30 Yr Treasury 5.018 4.857 4.56 4.82 4.77
30 Yr AAA Muni 4.71 4.680 4.50 4.66 4.69
EUR Currency 1.1693 1.1686 1.1425 1.0899 1.0488
JPY Currency 108.27 110.36 120.06 118.67 118.69
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