The Mean Economy: For housing industry, a fast fall and a slow rebound
Millions are choosing to walk away from their homes, losing them to the bank. Defaults and foreclosures have ranged near 12 percent of mortgage holders since 2008 — a stunning blight on America’s credit record that has forever changed the outlook for obtaining a mortgage and owning a home. Buyers now must typically drum up a 20 percent downpayment and have sterling credentials before they can even obtain a loan — a dauntingly high hurdle for many hopeful young people and an impossibility for millions of people with credit troubles.
For the 4 million families pushed out of their homes through foreclosure, and millions more awaiting repossession by the bank, the loss goes beyond the dwelling and extends to their good credit and peace of mind.
Between 2007 and 2011, the Federal Reserve found that the American middle-class lost an unprecedented 40 percent of its wealth due to the collapse in housing prices. It effectively ate away two year’s worth of income and a lifetime of savings in a blow that the average household will take years or even decades to recoup.
Vincent Reinhart, chief economist at Morgan Stanley who has studied the aftermath of debt crises in dozens of countries, said a major financial collapse like the one the U.S. went through in 2008 always delivers a deep and long-lasting blow to the economy, homeowners and workers. Though a recovery has been in place since mid-2009, the shocks from the crisis are still reverberating and are a major reason that it remains a mean, tough economy for workers and their families.
“This harsher climate is a familiar feature after a severe financial crisis,” he said. “A severe financial crisis chills economic performance for a very long time,” both because of the big debts that people have to work off, and the loss of income and savings.
Even for people with manageable debts like the Carrs, “the financial crisis wiped out the equivalent of almost two years’ worth of income from household balance sheets in 2008 and 2009,” he said.
Surviving in the mean economy
With less access to credit and feeling less wealthy and more vulnerable to further economic shocks, U.S. consumers have shown little appetite to spend as they scramble to replenish their savings and rebuild their wealth. The U.S. government, for its part, went deeply into debt trying to rescue the banks and economy from a worse fate, accumulating an $11 trillion debt load that also will slow growth as Congress struggles to bring it under control in coming years, Mr. Reinhart said.
So far, the U.S. experience has been pretty typical for economies going through a major debt crisis, according to Morgan Stanley’s study of the 15 worst financial crises in the second half of the 20th century.
“Economies typically went into a deep and long recession” followed by a “shallow” and unsatisfying recovery, Mr. Reinhart said.
Although the U.S. recovery has been a little better than most other countries studied, the outlook for the economy and workers who need jobs could be overshadowed for years by aftershocks from the crisis, he warned.
“The unemployment rate never regained its pre-crisis low in ten out of fifteen cases,” he said. “Indeed, in seven of fifteen cases, there were two recessions in the decade” following the crisis.
With the housing market finally ekeing out a feeble recovery this year, Eugene Steuerle, fellow at the Urban Institute, sees some hope amidst the rubble of ruined lives.
“There are, of course, real and agonizing losses from a recession,” particularly the lost contribution and income of unemployed workers that may never be fully recouped, he said. But the fall in home values is not entirely bad as it has sewn the seeds for a housing revival, he said.
“The buyer gains what the seller loses,” he said. That was the case with the Carr family, which is benefitting from the sale of another homeowner’s foreclosed property.
For people living in houses that have lost much of their value, the trade-off is similar, Mr. Steuerle said. “A retiree’s hope for selling and then spending down those assets in retirement may be reduced, but his children’s earnings go a lot further if they decide to buy a house,” he said.
© Copyright 2013 The Washington Times, LLC. Click here for reprint permission.