Damage Report 2008: Household Wealth Down $10 Trillion

Merrill Lynch has been among the more gloomy forecasters lately, and economist Sheryl King points to another reason why.

She writes that household balance sheets shed almost $3 trillion in the third quarter, thanks in large part to a decline in stock prices. That loss, the largest 3-month drop on record, brings the total loss by U.S. households in 2008 to $10 trillion, or about 10 years worth of equity earnings.

That is staggering.

Now for the bad news. From Merrill:

Real estate still tumbling

The Flow of Funds report also put a cap on the real estate boom, as those home ATMs pretty much fell silent. Household real estate assets fell for a 10th quarter out of the past 11 and the net worth of real estate is now down 32% since 2005. Mortgage debt actually declined in 3Q, by 1.7%, the first decline in 25 years. Moreover, we estimate that mortgage equity withdrawal was almost non-existent in 3Q, marking the lowest pace of home wealth extraction since the early 1990s – back in the day when no one had heard of option ARMs, interest only or NINJA mortgages.

Now the hard part

Persistent negative wealth effects from the slide in housing and equity prices should reinforce the uptrend in the personal savings rate, creating a highly disinflationary environment as job losses mount and unemployment rate rise toward 8-1/2% in the coming year. We estimate that the savings rate will rise to around 5% by 2010, on its way towards a more sustainable 6-7% at some point just beyond our forecast horizon. This is a daunting prospect for future US economic growth given that for every one percent increase in savings, consumer spending – that 70% of the GDP pie – is suppressed by a roughly equal amount.

Basically, to get growth back on track we need to spend more of the money we no longer have -- an unfortunate position containing little incentive to soothe just the sorts of fear-inducing paralysis that crippled markets this year and threaten to extend the duration of this recession.

Comments

[John Preston:]

"since the early 1990s – back in the day when no one had heard of option ARMs, interest only or NINJA mortgages."

Does anyone understand that the option ARM has been around since the early 1980's..and that NINJA has too...????? Maybe we should find new villans..

The problem is more about a breach of public trust by the large financial institutions,Wall Street and lax or poorly focused regulatory oversight...and now the drastic pullback in consumer spending and the resulting cuts in wages...

its not loan programs...they are simply repayment plans....

2008 Dec 15 08:56 AM

[notsosmart:]

the wealth was phony all along.that unemployment figure should be doubled to be closer to the truth.the arm's of 2006-7 willbe resetting soon.invest in tentmakers.

2008 Dec 15 10:02 AM

[RobertsJim:]

When did saving become evil, an act that will deepen the recession?

Intentionally placing your hard earned money in a bank saving it for the proverbial rainy day creates credit available to small and large businesses.

With the savings entrusted to it, the bank has to rent this money to creditworthy borrowers.

Savings is the fuel for economic growth. Don't fear it; foster it.

2008 Dec 15 10:04 AM

[joes:]

I think the problem with the mortgage situation was a combination of a bad loan plans (that had been around for a while as Mr. Preston points out) and the no regulation nonsense that Reagan started when he hired a Ayn Randian like Greenspan to run the banks, pushed over the edge by intense marketing that appealed to the most reliable of market drivers, greed.

Tough to live through and even harder to remember that there is always a sequel in the works.

2008 Dec 15 10:05 AM

[CWest:]

The good news. Given the evaporation of trillions of wealth from the USA the TARP can spend freely without being inflationary .

A mustard seed?

CWest

2008 Dec 15 10:07 AM

[xmplary:]

The problems we have today are caused by spending... the uncontrollable spending of money we were borrowing. So, saving is a good thing, despite the problems it may create create to those depend on our stupid spending habits. More spending is not the answer, it only leads to bigger problems. Let the awakening begin.

2008 Dec 15 10:52 AM

[Blackeyebart:]

Would you tell your son to spend money he doesn't have, to buy property he can't afford, to live high on the hog, without thought for tomorrow?

Oh I see - you just want everyone else's son (and daughter) to do that.

If Doctor's were like economists they would be celebrating cancer.
Growth without limits.

2008 Dec 16 02:28 AM