Let's see. Between July 2007 and January 2009, the median US residential housing price plunged from $230k to $165k or by 30%. That must have been some kind of super “tax cut”.
In fact, that brutal housing price plunge amounted to a $400 billion per year “savings” at the $1.5 trillion per year run-rate of residential housing turnover. So with all that extra money in their pockets consumers were positioned to spend-up a storm on shoes, shirts and dinners at the Red Lobster.
Except they didn't. And, no, it wasn't because housing is a purported “capital good” or that transactions are largely “financed” at upwards of 85% leverage ratios. None of those truisms changed consumer incomes or spending power per se.
Instead, what happened was the mortgage credit boom came to a thundering halt as the subprime default rates became visible. This abrupt halt to mortgage credit expansion, in turn, caused the whole chain of artificial economic activity that it had funded to rapidly evaporate.
And it was some kind of debt boom. The graph below is for all types of mortgage credit including commercial mortgages, and appropriately so. After all, the out-of-control strip mall construction during that period, for example, was owing to the unsustainable boom in home construction—especially the opening of “new communities” in the sand states by the publicly traded homebuilders trying to prove to Wall Street they were “growth machines”.
Soon Scottsdale AZ and Ft Myers FL were sprouting cookie cutter strip malls to host “new openings” for all the publicly traded specialty retail chains and restaurant concepts—–along with those lined-up in a bulging IPO pipeline. These step-children of the mortgage bubble were also held to be mighty engines of “growth”. Jim Cramer himself said so—-he just forgot to mention what happens when the music stops.
A similar kind of credit bubble chain materialized in the hospitality segment. As the mortgage debt spiral accelerated, households began tapping their homes ATM machines through a process called cash-out finance or MEW (mortgage equity withdrawal). At the peak of the borrowing frenzy in 2006-2007, the MEW rate was in the order of $500-$800 billion annually. Accordingly, upwards of 10% of household DPI (disposable personal income) was accounted for not by rising wages and salaries or even by more generous taxpayer financed transfer payments from Washington.
Actually, it was far easier than that. American families just hit their home ATM cash button, and applied the proceeds to bigger, better and longer vacations, among other things. Soon, hotel and vacation resort “revpar” (revenue per available room) was soaring owing to surging occupancy and higher room rates.
On the margin of course, the incremental demand that sent hotel revpar soaring was derived from mortgage credit confected out of thin air by the financial system. Yet in the short-run is was a strong signal for more investment in hotel rooms and that's exactly what materialized.
As it happened, of course, the revpar surge was a false signal and the hotel room building spree was a giant malinvestment. Construction spending on new hotels exploded from $10 billion to $40 billion annually during the 70 months after early 2003. Except….except that when the mortgage boom stopped and the frenzied MEW extraction halted, revpar plunged and the hotel room construction boom retraced back below the starting line in barely 20 months.
