This is first in a series that seeks to explain the origins of the housing bubble and what is at stake now that it is bursting.
Most Americans have a single asset that represents the vast majority of their wealth. The home is that asset. More than an asset the location, style, size and type define or taste and place in the world. Are you suburban, rural, urban? Do you live in a trailer park, a gated community or co-op? Is your home modern, Victorian, modest or McMansion? We are defined by our homes in many ways. Our houses are fast becoming debt traps. Round after round of home equity withdrawal (HEW), home equity lines of credit (HELOC), and multiple mortgages were the order of the past few years. America has turned to house price appreciation to bridge the growing distance between what a middle class life costs and what "middle class" Americans earn.
The middle class is an endangered species. The wage and tax norms that created it, from 1940s through the 1970s, are no longer in place. Changes in the international economy, corporate management and state policy have dismantled the system that produced our once large and fairly stable middle income multitudes. Anger at falling income, status and economic security define millions. Elections turn on their responses and tastes. Usually proxy issues define the day. Various disadvantaged groups are blamed and scape-goated. Now our houses are imperiled. The last bastion of middle class prosperity, the refuge and source of pride and credit is unsure. How America chooses to respond to the coming housing market pain will shape the fortunes of millions of families. It will shape political fortunes in 2008 and beyond.
How did we get here? We don't save money and our earnings are stagnant. Real savings from personal income in America have been negative for a year. The Chart below is made of 100% US Government data. Notice the zig zag pattern and the total lack of improvement in real average weekly earnings. The graph forms a knife edge pattern. We have been riding that edge, our incomes cut along that serrated blade. It costs more to be middle class. The extra money is not showing up in inflation adjusted paychecks. The real earnings in the graph below are adjusted for inflation. They measure what you earn and what you can buy with it.
Series Id: LEU0252881600
Not Seasonally Adjusted
Series title: (unadj)- Constant (1982) dollar adjusted to CPI-U- Median usual weekly earnings,Employed full time, Wage and salary workers
Earnings: Median usual weekly earnings - in constant (1982) dollars
All Industries, All Occupations, Both Sexes, All Races16 years and over.
Class of worker: Wage and salary workers, excludeing incorporated self employed
Labor force status: Employed full time.
Constant 1982 dollars Per Week Weekly Earnings 2001-2007
It is frightening to note that our negative savings rate (see graph below Personal Savings Rate) is a first since the Great Depression. This time it is the BEA, Bureau of Economics Analysis that furnishes our data. This graph is a picture of rapidly declining financial health in America.
Since we were not adequately earning we don't save. Costs keep rising as do demands from health care providers, tuitions, gas prices, food costs and more. We looked to our houses. Oh boy did we look to our houses. And for a while, we borrowed and borrowed and all that borrowing and spending bid up prices and allowed us to borrow more. How much more? See the below graph Home Mortgage Borrowing for an idea of how much more. In 2005 and 2006, home mortgage borrowing surpassed $1 trillion. It is staggering to think that more than $1000 billion was borrowed against homes in each of the last two years. The following two graphs come from Federal Reserve Board Data and we owe a thank you to the fine folks at Prudent Bear for putting them together.
We borrowed so fast that even the great housing bubble was slower than our borrowing. One way to measure this is to look at the money owed as a percentage of the value of assets. The Graph, Household Debt as a Percentage of Assets, gives a broad view of the spiking rate of overall indebtedness. This makes clear that we will have a future defined by a heavy burden of repaying past borrowing. Middle class America will not be able to spend a large portion of its future income. Trillions will have to be paid back to creditors.
The price of US housing stock doubled in the ten years 1996-2006. Thus, the equity the average American has in their home should have increased enormously. If money owed on the mortgage stays still and the price of the house shoots up, the percentage of the home's value owed to the bank falls fast. This is what we expect, it is not what happened. The percentage owned, called equity in the home, should have been rising, it fell. Oh boy did it fall. Home Equity as a Percent of Home Market Value shows the falling percentage that the average American family owns of their house. As I write to you the average household owns about as much of their house as the bank or
The first part of understanding the great American housing bust -- now only just in its early phase -- is learning about the boom that created this situation. The above prose and graphs try to set the stage. Average hourly earnings are stagnant. The cost of being middle class just keeps mercilessly rising. Debt is the only way to keep the material standing of living up in the here and now. After 2000 interest rates were cut and speculative fury moved from stocks over to housing. Cheap plentiful credit, rising home prices and desperate need for cash created and sustained the mother of all housing bubbles. Now it is bursting.
