Following up on my post the other day about the headwinds facing the market, I spent some time today digging through various data on home prices, consumer credit and mortgages, and Treasuries.

First, an attempt to put the extent of the prior credit expansion in perspective – the graph below represents 8.17% annualized growth of interest-bearing assets, going back to the start of 1985.

Now consider the percentage change in those assets over time: never before was there such a sustained high growth rate in banks’ assets. From Q4 2004 through Q1 2008, all quarters but one showed a year-over-year growth rate at or above 10%. And note the relative differences in banking balance sheet action coming out of the 1991 recession compared to the 2002 recession – there was a sustained period of year-over-year declines through 1993, whereas bank balance sheets continued expanding throughout the 2002 recession.

How has this translated to the individual level? The below graph shows indebtedness relating to home mortgages and consumer credit; the former nearly doubled in six years.

As the above suggests, while home mortgage debt increased quite rapidly, consumer credit debt held very firm. Looking over a longer time period, the two are typically more correlated than they were this decade (see 1970s, mid-80s, and late 90s). Does this mean there may be less of a problem with asset-backed debt (i.e. credit cards) than the market believes right now? I’m not sure, but it shows where the credit bubble really occurred, and how great the drop-off in mortgage lending has become – as does the second chart, which is in dollar terms.

Now some more direct housing data – this from S&P about Case-Shiller shows the changes in home prices from 20 large regional markets since January 2000. Most of the formerly-hot markets have seen prices drop 25% to 35% in the last year, with the “good” markets now seeing single-digit percentile price declines. This chart below shows the annualized increases implied by the current prices, as well as that figure less the average yield on 10-year Treasury securities during the period. What is most noteworthy is that the average market has now slightly underperformed Treasuries, by 0.15%. How long New York will hold up as the best-performing market is anyone’s guess, as the last numbers are from September.

To wrap up the charts, where do we sit overall? Well, bank assets as a percentage of GDP are at a high, and leverage means reduced flexibility.

Treasuries are the only asset class that has been “working” – note the eerie similarities in these charts of 10-year and 30-year Treasuries, along with an AAA-rated tranche of an asset-backed security index. Then remember that the Treasury graph shows yield, and the ABX shows price - and has components like the “Fremont Home Loan Trust” and “Long Beach Mortgage Loan Trust,” vintages 2006…

James Grant has taken to referring to Treasuries as “return-free risk,” and with yields where they are – not to mention things like the 10F10 swaps at 2.78% (i.e. the 10-year rate, 10 years from now) – I think that is an extremely elegant description.

There is a plan being floated to try to bring down mortgage rates to 4.5%, but will expanding the homeowner base through unnatural methods and an even larger extension of credit solve problems brought on by artificially inflating the homeowner base by overextending credit? The government is interfering in complex systems, and how it will extract itself from the present high levels of involvement is anyone’s guess, as are the consequences from doing so. Bespoke notes the surging prices in sovereign credit default swaps, where US CDS (although being inexpensive comparatively) have soared in the last month.

Subscribe to our feed using your favorite service: