Is Your Option "In-The-Money?"
Currently, only about 15% of the outstanding stock of mortgages have an in-the-money re-financing option . Thus, the vast majority of homeowners would have to “pay up” to extract equity from their home. Some will, no doubt, in part as a natural consequence of demographic-driven trade-ups (and trade-downs!), as well as the natural geographic moving about for which we Americans are famous. But the high-octane consumption fuel of rate-driven re-financings and equity extraction is yesterday’s news. Housing and consumer spending are slowing, and will continue to slow, even if the stock market continues to make the rich richer.
The journey to the New World would be over, and extraordinary returns to stocks would give way to lower expected “normalized” returns on stocks, a tautological consequence of a lower equity risk premium. Indeed, I used my New Year’s Eve missive at Warburg last year to “officially” declare myself agnostic on stocks at prevailing P/Es (Yes, PIMCO readers will get a New Year’s Eve missive this year!). Since then, my agnosticism has been morphing toward a conviction that, as at Rick’s Café, there may be a little gambling going on in them there S&P pits.
1 Thanks to Joe Tracy, Federal Reserve Bank of New York, for sharing his analysis of this data. See “Are Stocks Overtaking Real Estate In Household Portfolios?” Current Issues In Economics and Finance, Federal Reserve Bank of New York, April 1999.