The disappearance of home equity value is a lead weight on the recovery
By Mortimer B. Zuckerman
Posted: September 23, 2010
The mortgage market doesn’t help. It is virtually on life support from the government, which now guarantees about 95 percent of the mortgage market. The rare conventional lenders are now actually insisting on a substantial down payment and making other more stringent financial requirements. Household formation is also shrinking now, down to an annual rate of about 600,000, compared to net household formation during the bubble years, when it was in excess of a million annually. The most critical factor subduing the demand for housing is that home ownership is no longer seen as the great, long-term buildup in equity value it once was. So it is not too difficult to understand why demand for housing has declined and will not revive anytime soon.
This is a disturbing development for those who believe that housing is going to lead America to an economic recovery, as it did during the Great Depression and then through every recession since. Each time, residential construction preceded the recovery in the larger economy. This time, in the Great Recession, a lead weight on recovery has been the disappearance of some $6 trillion of home equity value, a loss that has had a devastating effect on consumer confidence, retirement savings, and current spending. Every further 1 percent decline in home prices today lowers household wealth
by approximately $170 billion. For each dollar lost in housing wealth, the estimate is that consumption is lowered by 5 cents or 5 percent. Add to this the fact that we are building a million-plus fewer homes on an annual basis from the peak years of the housing boom. With five people or more working on each home, we have permanently lost over 5 million jobs in residential construction.
That is why housing was such an important generator of normal economic recoveries. To give this context, residential construction was 6.3 percent of GDP at its recent peak in 2005 and 2006. It has fallen to the level of 2.4 percent this year. This is significant if you recognize that a 3 percent top-to-bottom decline in real GDP constitutes a serious recession.
Government programs to stimulate housing sales have not helped. There have been eight of them. One, which expired most recently (in the spring), was an $8,000 tax credit for housing contracts. All of these have done little more than distort the pattern of housing demand and actually pulled forward hundreds of thousands of units at the expense of future growth.
There is no painless, quick fix for this catastrophe. The more the government tries to paper over the housing crisis, and prevent housing from seeking its own equilibrium value in real terms, the longer it will take to find out what is true market pricing and then be able to grow from there.
The sad fact is that housing problems never left the recession of the last several years and it doesn’t look as if they are going to leave anytime soon. The ultimate solution remains the same as the solution to the country’s broader economic crisis. That is, getting millions of people back to productive work.
