Something I have written about in the past: the household balance sheet. We know that Equity = Assets - Liabilities.
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Household equity - derived from the household balance sheet
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I look at equity as a measure of expectations - the implied income less debt. The adage of buying a house for investment means you must sell your house. If you happen to live in the house it means you must seek another domicile. I'm sometimes not sure if that makes any investment sense, though I could see the case that a house may be a store of value.
I focus on households because we all belong to a household - whether that means you have a warm, loving family at home or you are a single, poor and miserable individual living on the street. Not everyone belongs to a business - some of us are retired, unemployed or in some way or another not part of a business. Of course, we all live within a nation, governed on our behalf by non-elected or elected rulers, but we are not the government.
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Household equity divided by disposable personal income (blue); household equity divided by gross domestic product (red).
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2004-2008 was phantom equity since the price level was being set by suicide borrowers like Casey Serin.
ReplyDeletePlus there was a feedback cycle going on where the higher home valuations were enabling people to spend more money into the economy, supporting more jobs, higher wages, and thus higher valuations.
This was wonderful while it lasted, but began running out of steam in 2007 and of course blew up completely in 2008.
What a mess. Equity valuation that requires a buyer is not actual wealth-accretion, just wealth transfer, assuming you can find that buyer.
My junior high English teacher would tell us that something is only "worth as much as what someone else will pay for it". This Casey Serin fellow obviously never took Ms. Nathan's English class.
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