The Impact of Falling Prices on Housing Bubble Home Equity
- The Housing Bubble created a net $8.0 trillion of Home Equity from 1995 through 2005.
- In the 3 years since 2005 $4.6 trillion of Home Equity has been destroyed by falling prices. This equates to 57.4% of the Housing Bubble equity gains.
- This 3-year loss completely off-set the gains experienced during the 4-year “mania portion” of the Housing Bubble from 2002 through 2005.
- At the current pace of price declines equity is being destroyed at a rate exceeding $2 trillion per year. If this dynamic continues the entirety of Housing Bubble equity gains will be destroyed by the third quarter of 2010 or approximately 14 months from now.
- Given that the first quarter set a U.S. record for fastest pace of house price declines, we are well on our way to realizing this outcome. It is likely that another $600 billion in Home Equity was wiped out during this one quarter. The Federal Reserve releases these updated figures tomorrow (June 11).
- Much of the economic growth and development of the past decade was driven by the distorting influence of Home Equity gains. The complete reversal of these gains bodes poorly for a consumer based economy that has geared itself to service homeowners in possession of an incremental $8.0 trillion of Home Equity.
Monday’s Home Equity Week (HEW) Article: Historical Home Equity Percentages Since 1945
Tuesday’s HEW Article: A Focus on Home Equity Since the Housing Bubble’s Inception
Thursday’s HEW Article: Could the Home Equity Value of the Entire U.S. Housing Stock Fall to Zero?
Posted by Whitney Ross at 6/10/2009 10:12 AM 
Categories: Housing Market Analysis, Financial Analysis, Focus on Home Equity
Categories: Housing Market Analysis, Financial Analysis, Focus on Home Equity
Great chart! Your last bullet is spot-on. Why have so few others connected the dots: consumer-driven economy will continue to contract now that "home ATM" is closed. Re-balancing will take years.
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Why buy a house when you can rent one…
Why buy a car when you can lease one….really??!!
All these don’t buy, prices are going to fall through the floor/roof makes me laugh.
If you plan to live in a house for more than 10 years or (drive a car for more than 5) it absolutely makes not sense to rent /lease.
A car’s value depriciates and it still makes sense to buy.
Unless you are in Sanfransisco, las Vegas, or on a Florida beach (i.e. 99% of America that is not these places ) you can atleast expect homevalues from 2009 not much below what it will be in 2019.
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With all do respect, I have to challenge each of your assertions.
Houses = Cars
Your comparison of houses to cars demonstrates a fundamental lack of understanding.
A car is by definition a “Depreciating Asset”. A buyer purchases a Depreciation Asset to consume the benefits the resource provides with the expectation/knowledge that the value of the asset will decline with use.
If you can afford to buy a car and have need for one, knock yourself out. In fact, this would be a great time to buy a used (and maybe a new) car given market conditions.
A house, throughout history and at least for the last 60 years in the U.S., has been an appreciating asset during good times and at minimum a store of value during bad times. How many people have you met during your lifetime that purchased a home with the expectation that its value would decline with use?
The two are not comparable.
The average American can engage in no more financially disastrous activity than borrowing a large sum of money to buy a depreciating asset in a highly leveraged transaction.
If you need a house, can afford a house and are unconcerned about the possibility of that asset’s value declining precipitously, then I have no problem with you or anyone else making an informed purchase. But how many American’s are truly informed about the financial risks of such a transaction?
I am not anti-homeownership. I simply recognize that homeownership only makes sense when you don’t dramatically overpay for the asset relative to its fundamental value or your personal financial situation.
Rigid Axioms
You are wrong in stating that “if you plan to live in a house for more than 10 years it makes no sense to rent”. You have stated a rigid axiom that does not always apply in dynamic circumstances.
Just because something has been so historically, does not mean that it will continue to exist in the future. See Lehman Brothers. Throughout the Housing Bubble your logic was used to proclaim that Housing Prices could not fall nationally because they never had. Houses were perceived to be riskless based on 60 years of history.
I note that following the Japanese Housing Bubble home values fell annually for 15 straight years and are likely to continue their decent giving Global and Japan-specific economic conditions.
I guarantee you (to the extent that one person can guarantee something to another) that people who relied on your baseless assertion and bought homes during 2004 – 2006 in San Francisco, San Diego, Miami, New York, Boston, Tampa, Sacramento, Phoenix, Las Vegas and Naples will not recoup their purchase values in real terms within the decade.
You may be right about purchases today or in other areas of the nation working out 10 years from now, but your logic is baseless.
Finally, even if we accepted your assertion as fact you seem to be ignoring the reality than many people buy a home with the expectation of living in it for less than 10 years. What advice would you offer these people in an environment where prices are collapsing but still wildly overvalued relative to historically verifiable valuation relationships?
If the more transitory Americans decided to sit out this market, the price collapse would really get interesting.
Stating the Obvious
I further note that Florida and California by themselves constitute in excess of 18% of the U.S. population. While not every house in these states was affected by the Housing Bubble and its present collapse, you are out of touch to believe that only 1% of the U.S. population is taking on considerable financial risk through home purchases.
Furthermore, I don’t think you have considered how debilitating or restrictive being underwater on your mortgage can be. Few people can predict with certainty their lives over a 10 year period. If an underwater homeowner wants or has to sell his house, options are limited. These include becoming a cash-flow negative landlord, foreclosure or writing a considerable check at closing the size of which few Americans can afford.
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