Connecting Household Balance Sheets to PSST

Interesting comment found by Glenn Reynolds. From Jeffrey Levin:

If you dig around and research start-ups you will find that the majority of start-ups are funded by second mortgages or HELOC draws. Due to the housing crash, that equity is just not there for the vast majority of people looking to start up a new business. Its one of the large reasons why commercial credit expansion has been so moribund. Without getting off the ground from seconds or HELOC’s all those startups that would have made it past year 1 and then been able to obtain standard commercial business loan never got off the ground and thus never graduated to commercial loan financing. You have to walk first before you can run. Startups don’t start in the commercial loan department (at least most of them don’t).

Recalculation means discovering new patterns of sustainable specialization and trade. Doing so requires entrepreneurial trial and error. As Levin points out, the stereotypical 20-year-old in a garage is actually atypical. Most entrepreneurs are like I was, forty years old and risking accumulated wealth. If my wealth had suddenly been halved in 1993, I doubt that I would have started a business in 1994.

And whose wealth got crushed by the housing crash? According to a paper by Edward Wolff, as cited in the WSJ blog:

The big drop in home prices between 2007 and 2010 meant a 59% loss in home equity for people under 35, compared with just 26% for people generally. That meant a massive loss of wealth, or “net worth” — what people own minus what they owe. People ages 35-44 saw a 49% fall in home equity.

Thanks to Mark Thoma for the pointer.

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6 Responses to Connecting Household Balance Sheets to PSST

  1. Ryan says:

    I’m glad this is getting attention. I’ve been interested in this for awhile (and am hoping to get a dissertation out of it). I think the evidence is indeed suggestive of a HELOC role in the startup collapse, but it’s complicated (see

  2. Jonathan Bechtel says:

    I think the “recalculation” in this instance is shifting startup finance away from traditional banking which has fairly rigid underwriting criteria these days (at least compared to 4-7 years ago), and towards a decentralized crowd sourced equity model.

    One of the hottest startup areas right now is small business funding that gives money in doses that are much smaller than traditional banks could do profitably.

    • Handle says:

      The question is why would it be unprofitable for banks to do small business loans, but profitable for individuals. If the argument is that there is some fixed loan management burden no matter what the size of the loan in, and that the loan must therefore be above a certain threshold to make the extension of credit worthwhile – why does the individual not face the same burden? Are they really doing the same things the bank is doing cheaper, or are they doing different things (or just not doing them).

      But, the funny thing, is that if the HELOC/second-mortgages argument has any validity to it, is that the banks were, indirectly, the ones investing in these businesses. That’s where the capital came from. It’s no different than me investing in your business and using a lien on your house as the sole collateral to secure my debt.

      • Colin K says:

        If you’re talking about crowdfunding, I think there’s a bunch of significant differences to bank loans.

        Bank loan officers can read a business plan and confirm that, yes, it will indeed take 50,000 people buying this fancy keyring for the company to make enough profit to service the loan. Will 50,000 buyers show up? That’s anybody’s guess.

        However, on a crowdfunding platform, instead of betting $50k that buyers will show up, you have one buyer betting $45 that the entrepreneur will be able to make 50,000 keyrings if he can raise $100k. If the buyers don’t materialize, you’re out no money.

        If it were possible to show a bank loan officer that you have firm contracts to purchase 50,000 fancy watches and you just need $100k to finance their manufacture, your odds of getting a loan would go from zero to very high. The internet just happens to make it easier to do that directly without the middleman.

  3. Ajay says:

    On the other hand, the fixed costs of launching an internet startup these days are practically nil, you just need to pay for the time spent setting it all up. You don’t have to spend $10k up front to buy a Sun web server, like many did back when you plunged in in the ’90s. ;) Take, for example, this company, Misto Box, that came on Shark Tank a couple weeks back. They raised $9k on kickstarter and put in $12k of their own money on their way to probably $10k/month in revenue within 4-5 months. The costs are down and there are many more ways to fund these days.

    Admittedly, Levin isn’t talking about the small minority of internet startups, but conventional startups can also use the crowd-funding websites, as Jonathan Bechtel mentions. The biggest problem these days isn’t funding, it’s having an idea that makes sense and knowing how to monetize it. Unfortunately, most VC-backed startups can’t clear either of those hurdles, so much money just goes down the drain.

    • Ajay says:

      Please fish comment out of spamtrap and delete this comment, thanks. I know you’re traveling, just a heads up.

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