Louis Uchitelle, in “A False Sense of Security? You Must Own a Home,” revisits the subject of Americans’ propensity to break into the piggybank of the accumulated equity in their home. In a concerned, rather than alarmist article, he points out that the amount of net homeowners’ equity has fallen, even in a time (until recently) of solid price appreciation:
Never before have homeowners actually had such a small ownership stake in the houses they occupy….
“Owners’ equity,” as the Federal Reserve calls the difference, is gradually eroding — a detail that millions of families ignore, focusing instead, perversely, on the rising dollar value of their homes…
[A] squeeze appears to be under way as home prices level off and begin to drop. The stake that families have in their homes fell faster in the 12 months through March than at any time since the early 1990s, the Fed reports. At the end of the first quarter, the nation’s homeowners owned, free of debt, only 52.7 percent of their dwellings, down from 54.1 percent a year earlier and 57.5 percent at the start of the century. The decline occurred even though owners’ equity, measured in dollars, rose by an astonishing $4.3 trillion since 2000. Unfortunately, mortgage debt rose by $5 trillion.
“Basically people are gradually consuming their capital,” said Edward N. Wolff, an economist at New York University who studies household wealth. “It makes the middle class in particular more vulnerable. Their homes are still their biggest saving, and that is the bottom line.”….
Even if prices continue to fall, homeowners are likely to cut their borrowing only slowly and reluctantly, if the last year’s behavior is a guide….
The first sharp decline in owners’ equity — nearly three percentage points — came in 1990 as home prices dropped while borrowing held strong. The decline then continued, despite the housing boom, although at a slower pace — a fraction of a percentage point annually during most years. And then last year, another steep drop in equity kicked in, as home prices weakened but owners kept up their borrowing.
“You might end up without enough pension income to pay off your mortgage, or enough equity to draw on if health costs get out of hand,” said Conrad Egan, president of the National Housing Conference. “But people seem to be saying, “O.K., I’m willing to live in that kind of environment.’ ”
Now this situation might not be so troubling if households had savings (uh, you know, the old fashioned kind, like cash in a bank or money market fund). But as even a casual reader of the financial press is likely to know, household savings rates have been falling. They were enough of a cause for pause that the Federal Reserve Bank of San Francisco issued the report, “What’s Behind the Low U.S. Personal Saving Rate?” in 2002 (note that this was the most recent study of this sort I found, which in and of itself is an oddity):
In recent years, the personal saving rate in the United States has fallen sharply, and it is now at a very low level compared either to U.S. historical experience or to the savings behavior of many other industrialized countries. From 1980 through 1994, the U.S. saving rate averaged 8%; thereafter, it fell steeply, and since mid-2000, with allowance made for the tax rebates that boosted household saving in the months of July, August, and September 2001, it has averaged approximately 1%. By contrast, the personal saving rates from 1980 through 2001 averaged 13% in Japan, 12% in Germany, and 15% in France, with no steep declines after 1994; in fact, in France, the saving rate rose slightly. For the United Kingdom, the personal saving rate was close to the U.S. rate during the 1980 to 1994 period, averaging 9%, but it has since declined only modestly to an average of 7% after 1994, while exhibiting very large swings throughout the sample period. For Canada, the personal saving rate did decline sharply during the latter half of the 1990s, but it is still higher than the U.S. rates, averaging 16% from 1980 through 1994 and 7% since 1994.
The study concludes that while some of the decline can be attributed to changes in measurement, (in 1998, mutual funds distributions that resulted from capital gains were reclassified from income to corporate profits; a change in 2001 led an 11 month period of slightly negative savings to be reclassified as positive), the most likely culprit is wealth effect.
It might be possible to remain sanguine about these trends (consumers spending everything they make and depleting household equity) if one truly believed that net worth was nevertheless increasing. While it may be in aggregate due to the tremendous rise in income and wealth for the top 1%, the picture for those closer to the mean seems to be low personal liquidity and increasing fixed obligations. The St. Louis Fed provides this chart of “Household Credit Market Debt Outstanding” with is its term of art for consumer debt:
So the critical question them becomes: how much do you believe in the housing boom? If you think the developments of the last year are a bit of congestion mainly due to subprimes, then this story isn’t too worrisome. But if you believe that the problems with subprimes are merely the beginning of a housing bubble coming back to earth, the overall level of consumer leverage bodes ill for the economy.
It isn’t just hard-core bears like Nouriel Roubini who feel that the housing market rose to unsustainable heights. The Economist determined that the US housing market as a whole was 20% overvalued in 2005, and further noted that when housing bubbles correct, prices frequently decline below “fair” value (as determined by historical relationships to income and rents), which means a fall of 20% or more is not out of the question. Yale economist Robert Shiller has examined real estate price data from 1890 (no typo) to 2004 and has concluded that the inflation adjusted appreciation of real estate is 0.4%. If you exclude the last ten years, which he regards as a bubble, the real returns go even closer to zero. So the faith in housing as an investment, as opposed to a mere store of wealth, looks dubious.