Disappearing now: $6 trillion in housing wealth

A Washington think tank is warning that housing prices are falling at an accelerating level, destroying wealth at a pace that will cost the average homeowner $85,000 in lost wealth this year alone.

The projections by the Center for Economic and Policy Research are based on the numbers in Tuesday's Case-Shiller home price index, which showed accelerating price declines in most big cities.

The annual rate of price decline over the last quarter was 24.9% in the 20-city index and 25.8% in the 10-city index," the center said in its Housing Market Monitor today. "At this rate of price decline, the excesses of the housing bubble will have largely disappeared by the end of the year. At the same time, the price decline implies an incredibly rapid loss of wealth. In real terms, the rate of price decline in the 20-city index would imply a loss of almost $6 trillion in real housing wealth over the course of the year, an average of $85,000 per homeowner."

I'm a so-so student of economic history, but I'd have to bet that, even adjusted for inflation, the only time that many Americans have lost that much wealth in a short period of time would have been during the Great Depression. I'm not even sure it happened during the Depression. (I understand: This hasn't happened yet; it's only a prediction.)

Repeating again: The CEPR says prices are falling so rapidly that the bubble will be gone by the end of 2008, but the loss of housing wealth will be massive.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo: Getty Images

Comments

[Jason]

They're not really losing wealth because they never had it in the first place. Their assets are being reset to the values they should have been. The ones that purchased homes for these inflated prices never had that wealth to begin in the first place.

[Florida Homeowner]

Much ado about nothing. If the average homeowner lost $85000 in this downturn, how much did the average homeowner gain from 2001 to 2006? In my case, based on current appraisals and similar sales, my home went up $400,000 and is now only up $200,000. Still pretty good return on a $300,000 investment, and since I haven't sold, it isn't over yet.

[Frank]

There is no doubt in my mind that Bush has played a significant role in ruining the US economy. At 72 I’ll be a long-time dead by the time our country is out of debt.

[JEFF]

Keep Falling Baby - I want to see a for sale sign on every block. Sorry homeowners - that phantom money you thought you had is all gone, better sell the flat screen if you want to keep your house! HA HA

[DG]

In the midst of a 'relief rally" you can almost hear people singing "happy days are here again" as if the worse is over.

We HIT the iceberg. Just because your not floating in the ocean yet doesn't mean the ship isn't sinking. REAL adjustments to how many American spend are slow to change.

Those that change quickly will be spared. Those who look for an alternative to the Housing ATM machine to fund their hyper-inflated lifestyle will be forced to move (hide) from the false reality of wealth.

GEE. False reality of wealth in LA? Nah. Get your 16-y.o.'s out of 4000 pound vehicles, out of brazilian bikinis, off the phone and into the classroom. Or your retirement will be anything but....

[John]

Very nice. The best thing that has happened to America in a long long time. Maybe all the real estate agents and house flippers can go back to delivering pizzas and we can all have normal home prices again.

[vultur]

I'm Greatly Depressed that I didn't act on the obvious short sale of subprime debt like Mr. Paulson. This fall was so obvious to anyone with common sense and I called it years ago but I lacked the courage to make that bet and cash in big time.

[Steve Plunk]

Remember this wealth magically appeared courtesy of the very same housing bubble that has now burst. Easy come, easy go.

[Cal]

What if you rent? I dont think the CPER is going to be invited to the NAR Christmas party.

[Hector]

Good. I'll be able to afford a house finally.

[Yarr]

That's what happens when housing prices spend a decade or more being over valued. Prices are just now correcting closer down to what the homes are actually worth. Too many people trying to get rich quick!

[JW]

The bubble may be over at the end of 2008 in many parts of the country but it's not going to be over in SoCal for several more years. There's a lot more pain to be had when the ARM resets start arriving in 2009-2010.

[Laker]

"....will cost the average homeowner $85,000 in lost wealth this year alone...."

What kind of WEALTH are you talking about?????? It is debt, not wealth. And even if you consider people that had their house suddenly gain huge equity...it was fake and mainly temporary. When this "wealth" is based on liar loans given to everybody that breath, that is not wealth but more like ponzy scheme temporary money making. I bet you $1000 that even my gold fish in my 10 gallon tank could get approved for that 80/20 $1,000,000 Option ARM loan back in 2005-2006.
Today that they are jsut starting to get back to normal lending practices....and my gold fish are suddenly not qualify for that option ARM loan...wow...what a surprise...How come??? My poor fish will need to leave the rest of their life in the 10 gallon tank, and not in a Mcmansion...

"....The CPER says prices are falling so rapidly that the bubble will be gone by the end of 2008....."

No SH**, please check my modest blog, I plotted the case shiller up to February and added my prediction that is just using current trend using some physics and gravity principles coupled with basic math. Look at the pink line...It is exactly what the CPER are saying...the bubble will deflate almost completely by start of 2009...
If you are curious, the yellow line is from shockg and lefty.

[Glenn / CA]

What you didn't say was how fast and how much the home prices went up. My home tripled in just 3 years before the bubble burst, and it has "only" lost 30% so far. If you look at the heartland of the country,they did not have their home prices rise like that, and they are not falling like that either.

The people who are affected were the ones who did not look to see what happened in the '90s and made very poor buying or refinancing decisions. Also, you only lose if you sell. Please tell the story instead of writing panic headlines.

[Dave-o]

Thank God I dumped my condo and got out of my ARM when I did.

Still gaining equity on my new home...houses are selling like crazy here, with almost no drop in prices.

[RZ]

How can wealth that didn't exist in the first place disappear? Am I wealthy because my combined credit card limit is near $100,000, even though I can't afford to spend even 10% of that amount? Of course not!

[Walt C]

The article only shows one side of the story. It fails to point out that for the last 6 years or so, housing prices rose so steeply as to create an un-affordable dream for so many people who would never have a chance to own a home, while creating the unrealistic illusion among so many people who bought into the idea that they suddenly had more money than they ever dreamed as though they had done something to create their riches. You make this out to be a depression like situation, while a strong argument can be made that housing wealth was never there to begin with. The last 6 years of growth has all been monopoly money to too many people with unrealistic expectations.

You cannot have it both ways. If you look at housing prices today compared to 7 years ago, it is still a huge gain. New buyers are still priced out of the market. People who owned the same home 7 years ago, are still ahead--on paper. The housing market can still fall but demand will still out pace supply, and when the credit markets reset, prices will be headed back up. So will the artificial wealth.

By the way, go back and look at the overall wealth loss of 2000-2001 during the dot com bubble burst. Another time of unrealistic expectations and over playing with the monopoly money.

[Happy4LA]

This is wealth that was not earned or based on anything but speculation in housing over the last 10 years. When median price housing has no correlation to the median priced home, something is wrong. Easy money was given to too many people whou should not have qualified for a loan. 10 years ago a $300,000 home was a nice home in California, now it isn't. That home is now approximately $700,000 in some areas even though incomes have not increased 200% over the last 10 years.

The mortgage companies have to be blamed here not just for causing this mess but for being negligent with the money they were loaning out. How stupid were they to give some of this loans? Not to mention the loans layered with fraudulent incomes to buy second and third homes on speculation.

[mlimberg]

""will cost the average homeowner $85,000 in lost wealth this year alone.""

You never had this gain unless you sold your home...

You do not have a "gain" unless you sell the asset.

Put that in the bank....

[Paul David]

No big deal if you're not in debt. The (paper) wealth increase of many of these people more than likely increased by that much over the last couple of years. The hurting ones are the ignorant or greedy that thought this would go on forever and 'cashed out' on this vaporous wealth!

[Jim]

Those projections are still overly optimistic. Based on historical lending patterns, a homeowner can only realistically afford a home at 3 X annual salary. With an average household income of approximately $40K, that means the average home price will have to drop to about $120K from its current level at just shy of $220K for equilibrium to be reached. That's almost 2 more years of declining prices.

That's just a straight-line extrapolation of lending policies. It doesn't take into account the explosion in gas prices, commodity prices, weak dollar, etc. Nor does it account for the current overhang of unsold homes on the market or those who will be tipped into foreclosure over the next 12 months by a declining economy.

I could go on, but in the interest of brevity I'll stop there. The conclusion: Don't look for a "bottoming-out" any time in the next 18-24 months. If we're lucky, we're talking about 2011 or 2012.

...and I'm being optimistic...

[elizabeth]

$6 trillion in "lost wealth"? No houses have disappeared, burnt down, been destroyed. The houses still exist -- homeowners still have a roof over their heads, and once the bubble has popped, new homeowners will find housing much more affordable. It's unfortunate that some people will lose in the process, but in the end it will be a GOOD thing!

[SDDan]

The 6 Trillion was never real to begin with. It was all make believe appreciation driven by easy credit.

[The Snob]

Let's start by agreeing that these numbers are big and would certainly have some important consequences. But, I'm not sure this number means much at face value.

My big question is, how much of this is destruction of real wealth versus paper losses? If you bought before 2000, then I'd bet that in most areas, your house is worth less than in 2006, but more than when you bought it. Certainly the people who bought from 2005-2007 are in danger of being underwater, as are those who took out HELOCs and blew the money. I've yet to see a good, detailed report on what those numbers look like.

[sonofdy]

After vast over-inflation of property values for years, why are you suprised? As yourself this, is a smal 2 bedroom house with almost no land really worth 500,000 dollars? Loss in real estate wealth? Not really. Just the market correcting. The only people being hurt here are those who were left with the hot potato. I saw this coming years ago when I saw people paying 400,000 for a shack, slapping a coat of paint on it and selling it for 500,000. I am sorry for those caught out at the end but this is no different from the dot gone bubble in the late 90's. Let the real estate market fall. In 12-24 months it will recover at a more realistic level.