Why Home Prices Are Important To the U.S. Economy

The chart below hasn't appeared here in quite some time - it has been updated with fresh third quarter data from the Federal Reserve's Z1 Flow of Funds report, released yesterday, to help explain why home prices are so important to the U.S. economy.

Those four arrows demarcate the last "difficult" period here in America - when stock prices stopped rising in 1999 and began to fall in 2000. If not for real estate, things would have been much worse as most of the $6 trillion decrease in stock market wealth (in blue) was offset by a $4 trillion increase in real estate wealth (in red) from 2000 through 2002.

[Note: this is all year-end data, so what was really a $9 trillion stock swoon appears as only $6 trillion since equity markets peaked in mid-2000 and bottomed in late 2002.]

In retrospect, the bursting of the stock market bubble was really just a little bump in the road - total household assets declined only slightly over those years and, in the last seven years, the value of household real estate has gained more than twice the amount that stocks lost between 2000 and 2002.

That is, after freakishly low interest rates in 2002 were followed by freakishly lax lending standards and freakishly exotic investment products from Wall Street.

As never before, the U.S. economy is dependent upon rising asset prices that enable the public to either sell those assets or borrow against them to fund consumer spending.

When the stock market bubble burst, real estate was there waiting to be inflated.

Look for that red area on the top of the chart to begin contracting in the next quarterly report from the Fed - that's when things will really get interesting.

A chart of the U.S. Dollar Index over the same time period.

Comments

[lefty:]

You are over emphesising. What is more inportant is "disposable income" which covers everything after necessitys. Food, energy, housing, medical. Disposable income for everyone below the board of directors level, has been decling for 10 years. When my home tripled in value. all that happened to me was doubling of real estate taxes.

2007 Dec 08 05:46 AM

[CM:]

Housing is not a Tech Stock - we need to live somewhere. How do you explain to your grandchildren that they cannot live in their own home because it will take them 30 years to save a downpayment?

Cheap housing should be the American Dream, not speculative profits. Or do we all need to move to Mexico?

2007 Dec 10 11:18 AM

[taison:]

Don't know what is the point of this article.

2007 Dec 10 12:08 PM