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| Home Equity is Not Savings
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Yesterday on CNBC’s “Closing Bell”
my bullish opponent in a "Bull vs. Bear" debate
rebutted my argument that Americans saved too little by claiming
that the methodology used to calculate savings was flawed
as it omits the accumulation of home equity. This foolish
argument, which amounts to nothing more than Wall Street’s
attempt to rationalize away a chronic problem, reveals a complete
lack of understanding of the concept of savings, and the important
role that savings plays in a free market economy.
Savings represent foregone consumption deferred
to a future date. It amounts to a personal sacrifice, the
deliberate postponement of immediate gratification. The saver
makes his savings available to finance capital investment,
which ultimately leads to increased productivity and rising
standards of living. In fact, savings are the life blood of
a market economy. Without savings, capital formation is impossible,
and true economic growth can not take place.
While it is true that home equity may be an
asset to an individual homeowner, its existence in no way
adds to society‘s stock of savings. Home equity does
not require the homeowner to forgo anything. Nor does it free
up any resources to finance capital formation. In fact, the
only way a homeowner can tap his equity is by accessing someone
else’s savings. He either has to sell his house, in
which case a buyer uses his own savings (or borrows someone
else’s) or he refinances, in which case he access someone
else’s savings himself. Therefore, not only does home
equity not represent savings, its existence actually represents
a potential claim on society’s legitimate supply of
savings. To the extent that it is used to finance consumption,
it actually crowds out savings which might otherwise have
been used to finance capital formation.
The main reason American homeowners can access
their home equity is that foreign savers are willing to lend
them the money. Once foreigners come to their senses, mortgage
credit will evaporate, and home equity will vanish along with
it. Unlike legitimate savings that are permanent, provide
real security, earn interest, and represent future purchasing
power, home equity will prove ephemeral, disappearing as quickly
as it appeared. From an individual perspective, counting home
equity as savings is analogous to a gambler counting his chips
while still seated at the card table. Having a big stack in
front of you means nothing if by the end of the game you’re
busted.
Going from the sublime to the ridiculous, yesterday
on Bloomberg Television, an “expert” proclaimed
that there was no housing bubble, and chastised the press
for irresponsibly scaring potential home buyers out of big
profits. His conclusion regarding the absence of a bubble
was based on his defining a bubble as “too much supply
with wide-spread job losses.” Since in his opinion none
of these criteria were met, there was no bubble. How can he
detect that which he can not even define? The proper definition
of a bubble is “Speculative buying of appreciating assets,
without regard to underlying investment returns (in the case
of real estate that would be rents), solely on the anticipation
of future price appreciation.” This definition describes
today’s real estate market precisely. What this expert
actually defined were two potential pins which might ultimately
prick the real estate bubble, not the bubble itself!
However, I would argue that an over-supply of
housing already exists, as many properties are now owned by
investor/speculators, who have no intention of actually living
in the properties themselves, and for which no rental demand
actually exists. Other units are occupied by owner/speculators,
intent on selling before the rates on their ARMs rise to levels
they can not afford. When these properties come to the market,
and no greater fools remain to buy them, the artificial “housing
shortage” will turn into a glut. As job losses follow,
perhaps this ‘expert” will finally see the housing
bubble just after it bursts. In fact, with judgment like that,
he may be the ideal candidate to replace Alan Greenspan as
Fed chairman.
If you missed my latest CNBC “Closing
Bell” appearance you can view it on my web site at http://www.europac.net/video.asp
beginning Friday, August 26th, along with a recent “Squawk
Box” appearance available today. While there, make sure
to download my free research report “The Collapsing
Dollar: The Powerful Case for Investing in Foreign Equities,”
also available at www.researchreport1.com
Peter D. Schiff, President
Euro Pacific Capital, Inc.
10 Corbin Drive, Suite B
Darien, Ct. 06820
phone 203-662-9700
toll free 888-377-3722
email schiff@europac.net
web www.europac.net
*****
If you have not yet done so, download my free
research report at www.researchreport1.com,
and get out of the dollar before the race turns into a stampede.
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