Wednesday, April 23, 2008

Diane Swonk Waxes Poetically about Falling House Prices

She writes:

[The housing downturn] not only represents a hit to the American economy, but it represents a hit to the American psyche. It is a straw that breaks the back of working class households who feel they have already given more than their fair share in an economy that penalizes manual labor relative to educational attainment.

A more prosaic way to put it is that home equity is often the only wealth that people in the lower half of the income distribution have. According to the 2004 SCF, 40 percent of those in the bottom quintile of the income distribution have some home equity; only 12 percent own stock.


Acad Ronin said...

Which is why we should question a tax code and other measures that encourage people to hold a portfolio that is undiversified in the extreme as frequently people's jobs and house prices may be positively correlated (think of company towns for an extreme case). Shiller's idea of house price insurance would help.

Anonymous said...

They store deferred consumption using homes because interest rates are perceived to be negative in the long run. That is, put enough money in a bank account to buy a mid size car, and 10 years later you can no longer buy a mid size car with what is in the account. Prices went up faster than the nominal value of the account. Stocks are too volatile for many people's temperament.

Of course, "savings" in the form of home equity cannot be loaned out. Thus the need to fund business expansion and consumer purchases via foreign savings.

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