Thursday, August 18, 2011
Housing Prices Still Falling - Thirteen Trillion in Home Equity (Savings) Lost
The median price of a single-family house fell in 109 of 150 metropolitan areas in the second quarter as foreclosures devalued real estate. In 2005, owners' equity represented 58.5% of real estate values. According to most studies, people will increase their spending by about $5 for each $100 increase in their net wealth. Therefore, they will reduce their spending by $5 for each $100 reduction in their wealth as well. Unless we have increasing employment and rising incomes, there is no way to replace that lost savings. The attempt by individuals to replace this savings loss will only further reduce consumer spending. There is no way possible to export your way out of that trap.
Such a huge gap in demand can only be replaced by government spending on infrastructure projects or support for manufacturing that will replace imports. If you assume that people will save 7% of their income, it will take $100 Trillion spending to generate public savings lost in the housing debacle? How do you get out of that mess?