Clearly, American consumers failed to do their job of propping up GDP in the fourth quarter.
GDP was crummy, with its snail-like growth rate of 0.7%, hammered by energy, exports, production, and inventories that are coming out of everyone’s ears and that businesses are finally whittling down. Even auto production has suddenly softened though it had been booming for years. And spending by businesses, which are caught up in a wave of cost-cutting and financial engineering, was dismal.
So the powerful force that was supposed to have propped up GDP was consumer spending, which accounts for 70% of it. Economists were in total agreement that consumers had “every reason to spend,” with the official unemployment rate being so low and credit so easy. But consumers just didn’t go along with the program enthusiastically enough. The warm weather got blamed.
But there’s hope.
Even while businesses are cutting back and slashing expenses, consumers are rediscovering in massive numbers the miraculous concept of using their homes as ATMs.
The housing market in many cities has by now transcended the crazy peak levels of the prior housing bubble, the one that everyone called “bubble” only after it had imploded, while denying its existence throughout its life.
And consumers are once again using these soaring home prices, ephemeral as they may be, as miraculous ATMs that just keep on giving.
So Equifax reported today that the number of first mortgage originations in the January through October period soared 37% year-over-year to 6.64 million mortgages, and that the total balance of these first mortgages skyrocketed by 51%.
$1.56 trillion of first mortgages were originated in the period, the result of a booming number of mortgages combined with rampant home-price inflation. Note, these are just first mortgages and do not include refis.
It’s all there, including surging subprime.
The number of first mortgage originations for subprime borrowers over the period soared 28% to 312,000. The total amount of those new subprime mortgages skyrocket 45% to $50.7 billion. Again, more mortgages combined with home price inflation.
Equifax defines “subprime” borrowers as those with an Equifax Risk Score of 620 or below (similar to a FICO score), on a scale where 850 marks the top end. The lower the credit score, the higher the credit risk.
The report explained, “credit standards are becoming more accommodating to meet market demand.”
Of course. We knew that. We figured that out during the last subprime fiasco. And so the inevitable: “The industry is also seeing an increase in subprime activity within the home equity market.”
Turns out, home equity extraction is booming.
Total outstanding balances of home equity lines of credit (HELOCs) have risen to nearly $500 billion. Those are the actual amounts owed. Credit limits, which also reflect unused credit, are far higher. So credit limits of new HELOC originations over the period hit $121.6 billion, 20% more than were originated a year ago.
And the total number of new HELOC originations rose 12% to 1.17 million, the highest since 2008. Ah, the beauty of Housing Bubble 2. And credit limits of subprime HELOCs rose 7% during the period to $608 billion.
Similar trends are bubbling up with home equity installment loans. Over the same period, $21.9 billion were originated, up 20% year-over-year. Outstanding balances as of December hit $132.7 billion. And the number of home equity loans originated for subprime borrowers shot up 25% to 652,200 loans, the highest level since 2008.
This is a great moment for the US housing market.
The Fed has finally healed it. We’re back to our old tricks. Home prices have been inflated to crazy levels in many cities. And now everyone is once again certain that you can’t lose money in real estate, that home prices will always go up, and that at worst, there might be a “plateau” for a few months. Forgotten are the lessons, bank collapses, bailouts, and shenanigans of just a few years ago.
Economists are once again hoping that consumers – prime and subprime borrowers alike – will use their inflated home prices as miracle ATMs, to extract the home price increases via HELOCs, home equity installment loans, and refis, and that they spend this money quickly before the next housing crash comes along and pulls the rug out from under all of it.
Consumers need to borrow and spend to prop up this economy because businesses aren’t doing it. They’re cutting back while blowing borrowed money on financial engineering projects, rather than productive investments. The result is a toxic cocktail. Read… Already Lousy Corporate Investment Comes Totally Unglued