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.