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American wealth down 40%

So says the Federal Reserve. And most of it? The downward spiral of the housing market.

Rakesh Kochhar, associate director of research at the Pew Hispanic Center, calls this phenomenon the “reverse wealth effect.” As consumers watched the value of their homes rise during the boom, they felt more confident spending money, even if they did not actually cash in on the gains. Now, the moribund housing market has made many Americans wary of spending, even if their losses are just on paper.

This is exactly what I’ve been saying for a while now. Consumer spending drives about 70% of the U.S. economy. As long as people feel wealthy, they will spend money, even if it means that spending is on credit.

The housing market has reset to a new normal, with values that are more in line with incomes. (The increase in housing prices was not accompanied by an increase in income, which is why all those crazy mortgage options were offered in the first place.) And when we finally start seeing increases, I suspect they will be more in line with what we used to see: 3%-5% a year, and not the crazy 20%-25%.

Yes, my house is worth less than it was in 2007. But it’s still worth about 175% of what I paid for it in 1999, as opposed to 2 1/2 times what I paid for it at the height of the market. I’m just happy not to be upside down.

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6 thoughts on “American wealth down 40%

  1. I do not believe that the housing has hit its new normal yet. Purchase prices are still way out of line with rental prices. Until prices get to the point that potential landlords can buy a house and make a profit renting it out, the prices have not bottomed out.

    I do not think that debt spending (via credit cards, home equity loans, or government debt) has any positive effect on economic growth. It merely transfers money from one set of people (the creditors) to another (the debtors). It does not matter whether the first group or the second spends the money.

    And if consumer spending only drives 70% of the economy, what drives the other 30%?

  2. This report will get a lot of political play from my side of the aisle, but I think it’s not that big a deal to most responsible people. You — and other responsible people — are not underwater because you didn’t dip into paper gains, or overextend based upon them. The people most hurt by this happenstance are those who thought there was a shortcut to the “American Dream.” And just as Ralph Kramden learned on a practically weekly basis, there’s rarely such a thing as a successful “get rich quick” scheme.

    • Well, many young families entered the housing market during the bubble years because they thought that if they did not buy then, they would never be able to afford to. It was just as illogical as buying houses as get-rich-quick schemes, but it was buying on fear not greed.

    • While I agree there is no shortcut to getting rich quick (and certainly no shortage of people willing to believe there is – exhibit A), I’ve become increasingly convinced that far too many lack the knowledge to be responsible. They think they are being responsible, but in reality, they aren’t. They are misled by folks who they trust.

      The folks who got burned on the housing market – by getting in at its height – are similar to the folks who got burned in the stock market earlier – by getting in at its height.

      Financial literacy is abysmal – and the topic of my column in today’s Virginian-Pilot.

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