Stephanie Pomboy

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					                                                                                                                                                                                                   Stephanie Pomboy
                                                                                                                                                                                                                             212.989.3311




                                                                            The Great Bubble Transfer


Either by simple serendipity or in yet another flawlessly orchestrated
performance by the Maestro, the U.S. has quietly undergone the greatest ‘Bubble
Transfer’ in history.

The $3 trillion in wealth that was so abruptly lopped off the top of the
Wilshire since its peak in March 2000 has miraculously resurfaced in the
real estate market where homeowners have seen the value of their homes
appreciate $2-3 trillion over the same timeframe.



                                           Housing Wealth vs. Stock Market Wealth
                                                           $Billions
  14500                                                                                                                                                                                                                                         127000

  13500
                                                                                                                                                                                                                                                123500
  12500
                                                                                                                                                                                                                                                120000
  11500
                                                                                                                                                                                                                                                116500
  10500
                                                                                                                                                                                                                                                113000
   9500

   8500                                                                                                                                                                                                                                         109500

   7500                                                                                                                                                                                                                                         106000

   6500
                                                                                                                                                                                                                                                102500
   5500
                                                                                                                                                                                                                                                99000
   4500
                                                                                                                                                                                                                                                95500
   3500
                                                                                                                                                                                                                                                92000
   2500

   1500                                                                                                                                                                                                                                         88500

    500                                                                                                                                                                                                                                         85000
                                                                                                                                                                                                                                      q1-2022
          Q1-1980

                    Q1-1981

                              Q1-1982

                                        Q1-1983

                                                  Q1-1984

                                                            Q1-1985

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                                                                                Q1-1987

                                                                                          Q1-1988

                                                                                                    Q1-1989

                                                                                                              Q1-1990

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                                                                                                                                                      Q1-1994

                                                                                                                                                                Q1-1995

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                                                                                                                                                                                    Q1-1997

                                                                                                                                                                                              Q1-1998

                                                                                                                                                                                                        Q1-1999

                                                                                                                                                                                                                  Q1-2000

                                                                                                                                                                                                                            Q1-2001




Like the bubble in financial assets, the new real estate bubble has its own
distinctly disturbing characteristics. For example, one could argue, and quite
cogently, that the home has become the new ‘margin account’ as consumers
through popular programs like ‘cash-out’ Refi increasingly leverage against
unrealized gains in their single largest asset.


                                                                                                                                  1                                                                                               April 3, 2002
                                                                                                                                                                                    Stephanie Pomboy
                                                                                                                                                                                                              212.989.3311


Perhaps the most disturbing hallmark of this Refi mania is the corresponding
plunge in homeowners’ equity stake, especially in an environment where secular
lows in both the Unemployment Rate and Mortgage Rates would suggest just the
opposite would occur.


                                                                     Homeowners Equity % Home Value

   72




  69.5




   67




  64.5




   62




  59.5




   57




  54.5




   52
         Q1-1980


                   Q1-1981


                             Q1-1982


                                       Q1-1983


                                                 Q1-1984


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                                                                      Q1-1986


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                                                                                                                                                                                              Q1-1998


                                                                                                                                                                                                        Q1-1999


                                                                                                                                                                                                                   Q1-2000


                                                                                                                                                                                                                             Q1-2001




The cash-out Refi numbers reveal a ‘speculative fervor’ that makes the Nasdaq
mania look tame. According to estimates by Fannie Mae, the average cash-out
Refi is $34,000. This sounds like a lot to me, particularly considering that the
median home price is just $150,000…e.g., the average Joe is extracting 20%
of his home value!

In total, Fannie Mae estimates that $75 to $80b will be drawn out of homes this
year with about 60% of that cash being spent with the remainder being used to
pay down high interest debt. (The Fed expects over 70% to be spent). Either
way, this translates to about $50-55b increase in consumption, or one full
month’s worth of annual Personal Consumption Expenditures.

So the impact on consumption is both real and largely quantifiable.




                                                                                                                        2                                                                                         April 3, 2002
                                                                                                                                                                                                                                    Stephanie Pomboy
                                                                                                                                                                                                                                                                     212.989.3311

Moreover, there is evidence to suggest that the housing wealth effect may be
significantly larger than the stock market wealth effect we’ve become so
obsessed with.

Based on a recent study by Robert Shiller (of “Irrational Exuberance” fame)
housing has always been a more important driver for consumers than the stock
market. In his rigorous state-by-state and 14 country analysis, he found housing
to have TWICE the correlation with consumption than the stock market has.

So, with housing in the driver’s seat of the great consumption rig, it bears
considering what the future holds for the sector.

As to the demand side, it’s essentially a factor of employment and
demographics. Given the remarkable strength in employment, it’s hard to
envision it getting much better from here. And household formations, having
peaked in 1998 and are headed steadily downward as the baby-boom bulge
moves into retirement. So, the outlook for demand would appear to be
stagnant, at best.

Meanwhile, the supply picture looks considerably less favorable. Like the
real estate boom of the mid-1980s, the recent run up in prices has invited an
enormous amount of new construction.

                                                                                               New Residential Construction


            400




            350




            300




            250




            200




            150




            100
                  Jan-1980


                             Jan-1981


                                        Jan-1982


                                                   Jan-1983


                                                              Jan-1984


                                                                         Jan-1985


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                                                                                                Jan-1987


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                                                                                                                                            Jan-1991


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                                                                                                                                                                                                                                                                     Jan-2002




             50




Some of this new supply is already being reflected in the Inventory of Unsold
Homes, which has started to trend higher.




                                                                                                                                            3                                                                                                                         April 3, 2002
                                                                                                                                                                                   Stephanie Pomboy
                                                                                                                                                                                                          212.989.3311

      With all this supply coming on, it’s just a matter of time before prices get
      smacked…


                                Inventory of Unsold Homes vs. Median Home Price

3250000
                                                                                                                                                                                                                                             10.00


3000000



                                                                                                                                                                                                                                             7.50
2750000




2500000

                                                                                                                                                                                                                                             5.00


2250000




2000000                                                                                                                                                                                                                                      2.50




1750000

                                                                                                                                                                                                                                             0.00

1500000




1250000                                                                                                                                                                                                                                      -2.50
          Sep-1982


                     Sep-1983


                                Sep-1984


                                           Sep-1985


                                                      Sep-1986


                                                                 Sep-1987


                                                                            Sep-1988


                                                                                       Sep-1989


                                                                                                  Sep-1990


                                                                                                             Sep-1991


                                                                                                                            Sep-1992


                                                                                                                                       Sep-1993


                                                                                                                                                  Sep-1994


                                                                                                                                                             Sep-1995


                                                                                                                                                                        Sep-1996


                                                                                                                                                                                    Sep-1997


                                                                                                                                                                                               Sep-1998


                                                                                                                                                                                                            Sep-1999


                                                                                                                                                                                                                       Sep-2000


                                                                                                                                                                                                                                  Sep-2001




      And this is where things get ugly…

      With homeowners’ equity near all-time lows, any softening in home prices
      could engender the risk of a cascade into negative equity.

      But even more immediately, the increase in mortgage debt service (again,
      despite new lows in mortgage rates) does not bode well for consumption as
      the Fed prepares to reverse course.




                                                                                                                        4                                                                                 April 3, 2002
                                                                                                                                                                                   Stephanie Pomboy
                                                                                                                                                                                                             212.989.3311


                                                                              Mortgage Debt Service % DPI

  6.6


  6.4


  6.2


   6


  5.8


  5.6


  5.4


  5.2


   5


  4.8


  4.6


  4.4


  4.2


   4
        Q1-1980


                  Q1-1981


                            Q1-1982


                                      Q1-1983


                                                Q1-1984


                                                          Q1-1985


                                                                    Q1-1986


                                                                               Q1-1987


                                                                                         Q1-1988


                                                                                                   Q1-1989


                                                                                                             Q1-1990


                                                                                                                       Q1-1991


                                                                                                                                 Q1-1992


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                                                                                                                                                                                             Q1-1998


                                                                                                                                                                                                       Q1-1999


                                                                                                                                                                                                                  Q1-2000


                                                                                                                                                                                                                            Q1-2001
LET’S TWIST AGAIN… ?

Aware that the underpinnings of the current recovery are rooted in this housing
bubble, Greenspan will surely make no haste in raising rates. But, should
inflation pressures (like the recent increase in energy prices) force his hand, we
would not be surprised, in fact we would expect to see the Fed try to tinker
with the shape of the yield curve to keep mortgage rates down. (Like they did
last winter in their coordinated ‘Operation Twist’ with Treasury).

In light of the recent revelation that the Fed discussed employing ‘unconventional
measures’, should their standard tools be rendered impotent, we must surely be
alert to what they may be doing behind the curtain.




                                                                                                                       5                                                                                         April 3, 2002