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

[David Hale]

Interesting, However I would note that the truly mind-boggling prediction of "6 trillion" was an inflated value that lacked a historical foundation, hence it is a disappearance of "money" that was not warrented in the first place.

[Donny]

Is that real wealth or perceived wealth based on an extremely speculative housing market? I feel for the ones left holding the bag; but homes are like the stock market. You don't want to be the last buying it. This has to be cyclical or else we'd have clerks making $250,000 as minimum wage. Home prices will adjust and realistic people will have another chance, a better chance, to buy a home.

[JK]

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

Except it's not really wealth until you actually sell the home and pocket the money. I think that's been a big part of the problem. People think they are wealthy because some arbitrary appraiser told them that their home is worth some ridiculous figure. Your home is worth what people are willing to pay for it. If you have $1 million in equity in your home, do you really have a million dollars? NO, not until you are able to sell the home for a million over what you paid for it and then actually get the money.

[UhhhhWhat]

****There is no doubt in my mind that Bush has played a significant role in ruining the US economy. ****

Right. Because you say so. An overinflated RE market is finally adjusting and this is evidence that Bush "ruined" the US economy.

[ideal4investors]

I agree it is a great loss of wealth in a short period of time. But it would be interesting to see how much wealth the average homeowner has accumulated in the past 5 years even with the recent drop? Or the past 10 years? I would bet that even with the deflation in home values taking place right now, many people are still seeing a very good rate of return on their homes in the long term.

[Lisa]

I live in Houston, Texas where our home prices were not inflated. I live in a very nice neighborhood with a 2700 square foot home on a huge lot with big shady oaks in one of the best school districts in Texas. I paid $160,000 for my home with granite countertops, all stainless appliances, a sprinkler system, a manicured landscaped lawn, a hidden back alley garage, on a 14,000 square foot lot. My relatives that live in California and Upstate New York are awestruck at the size and quality of home you can purchase in Houston. I think the home prices here are more realistic and in line with reality. People in other areas that lived in a home like mine who were told it was worth $450,000 and then went out and borrowed $100,000 on that only to find their home is no longer worth what they thought got themselves in their own pickle. If I had been told my home was worth a million bucks, I would still be fine because I didn't overextend myself by pulling imaginary money i didn't really have out of my home.

[ideal4investors]

I agree it is a great loss of wealth in a short period of time. But it would be interesting to see how much wealth the average homeowner has accumulated in the past 5 years even with the recent drop? Or the past 10 years? I would bet that even with the deflation in home values taking place right now, many people are still seeing a very good rate of return on their homes in the long term.

[Ben]

And for those like me that bought a house during this period, and never 'spent' our vanishing equity, we now owe more than its worth.

[Duane LeGate]

We called this in September of 2006, all the way down to the MSA level.

Here is the audio of the intereview… http://www.centralvalleybusinesstimes.com/
links/bubble.mp3

Here is the link of the article… http://www.centralvalleybusinesstimes.com/
stories/001/?ID=3053

BTW.. also called HEDGE FUNDS BEING IN TROUBLE… due to this (in the audio)

For what its worth, home prices will stabilize by 6-9 months... we are at bottom as we speak.

[Robert]

Good, let them keep on a falling.

[John Lepone]

The Fed bail out of institutions that made bad credit decisions for excess profits is coming out of everyone's pockets. In 1965 my wife and I both has jobs and my mother still had to sign for our loan to purchase a new car. In the 1990s my son had a gold credit card while a senior in college with no job. The idea that bad loans are ok as long as the intrest is high enough, is bad business. Our current credit mess, driven by greed, is a house of cards ready to fall.

[Duane LeGate]

we called this back in 2006, all the way down to the MSA level.

Here is the audio of the intereview… http://www.centralvalleybusinesstimes.com/links/\
bubble.mp3

Here is the link of the article… http://www.centralvalleybusinesstimes.com/
stories/001/?ID=3053

BTW.. also called HEDGE FUNDS BEING IN TROUBLE (in the audio)

For what its worth, we are almost at bottom..

http://www.HBNInteractive.com

[Kevin]

To anyone who was stupid enough to get an ARM when rates were at historical lows - Do you watch the Simpsons? I picutre a BIG, "Ha Ha" from Nelson...

Why in the world would you get an ARM when rates are at historic lows??? They can only go one way, UP!

this is a much need market correction and the 'wealth' never existed in the first place.

[John]

Peter, how can the bubble be gone by the end of 2008 if the Option ARM and Alt-A ARM resets don't happen until 2010 through early 2012?

I know it's not question day, but your thoughts on this would be welcome.

Are we going to be deep into over-correction territory soon?

[tuma]

Total BS. The "wealth" to being lost was never there in the first place. It was phantom wealth. It was illusionary. It was 'wealth' backed by speculation and as with everything speculative then end is justified. Housing must come down more and even faster; align with fundamentals (rents,income,population) and return to historical norms. Then and only then can we relaunch this economy on a sustainable footing. That's why you have to help us STOP the bailout...>

www.angryrenter.com

[Evil Banker]

Hahaha... "disappearing" are journalistic ethics. Anybody with half a brain knows that wealth doesn't disappear. It simply changes hands.

In this case, the wealth was stolen by greedy appraisers, lenders and realtors pushing unconscionable financing products and schemes just so they could get their commissions.

The American Dream has become the American Scheme and the rest of the world is onto you... that's why we Evil Bankers are crushing the dollar - to make you poorer than ever.

[David]

Posted by: Frank | April 30, 2008 at 10:29 AM

Frank, open your eyes man. More people owning homes is a good thing from a tax perspective i.e. the city/state/federal government coffers overflow. The problem is that ALL of our elected officials showed no fiscal restraint, not just Bush and his administration. Watch your trash bill: Mayor V is raising your rate to cover what? Yep, the lost tax revenue from foreclosed owners and empty houses. But you sure never heard a squeak out of him OR Ahnold back when the fountain of tax revenue was running over, did you? If you'd like to point a finger, look to the Federal Reserve and their monetary policy, NOT the White House. Loose lending by less than scrupulous financial institutions to morons without a pot to pee in resulted in the current fiscal issues (note: we're not in a recession based on Q1 economic growth stats released today). Bush offered opportunities that helped the post-9/11/01 economy recover; greed drove the rest of the market to find loopholes, prey on the willing, and put the big lenders at risk of write-offs. But hey, what's $20B when you made $100B?

Listen, you're 72 so I know you've played slot machines. When you put $100 in and you only get $20 back, then you put that in and wind up with empty pockets, do you walk over to a pit boss and ask him if you can get your money back 'because you weren't aware of the risks of gambling' or 'weren't told that you might lose all your money AND the house's money'? Heck no. No one held your feet to the fire ~ just like no one forced you to go out and buy a house with unsustainable payment terms. But at 72, you're probably smarter than that, right?

The Feds should not reward stupid people for making stupid decisions with taxpayer dollars. Bush gets it but he's being forced to cut the idiots financial slack by the Dems. McCain gets it too. Hillary and Obie, not so much: taxpayers should not be responsible for bailing out homeowners who A) knew they were getting in over their head or B) have changing circumstances that prevent them from making their payments. If I take out a marker at the blackjack table and lose, you think the pit boss is letting me off the hook? You want to play, you got to pay, and if you can't, you suffer the consequences i.e. bankruptcy, foreclosure, bad credit, tax bills, etc.

What is my reward for making ALL of my payments, on time, for more than the minimum, on the mortgages in my name? Anyone? Can I get some taxpayer dollars for being a GOOD mortgage holder?? Puh-lease.

[Tom]

How about the reason for the bubble in the first place? The bankers did not just suddenly and collectively lose their minds. The Fed created this bubble when it tried to re-inflate the stock bubble that burst in 2000/2001. By opening the spigot on credit, banks were flooded with liquidity, and gave mortgages, conservatively at first, but with a continued credit flood all the way through 2005, houses were rising so fast it seemed there was no losing. That is when the risky lending kicked in, but the roots go back further.

Also, the Fed is doing the same thing now, trying to re-inflate housing. And like last time, the bubble is going elsewhere, this time to commodities. All we get is higher prices, without saving the banks or the housing bubble.

[Doug]

This wealth was real wealth just like the wealth in stocks or 401ks are real wealth. If your stocks go up, you are wealthier, even if it's just on paper. Everything is just paper or computer data. It's the collective acceptance of these items that constitute a sense of wealth. The dollar is just paper. I'm a real estate appraiser in Detroit. I've seen this coming for years. The problem was not low interest rates, it was the severe lowering of credit standards and loan to value ratios that the big banks did to get more loans to sell to Wall Street for big commissions. Even with low rates, if they had not made it possible for borrowers to get these loans, we wouldn't be in this situation. The name of the game was to approve anything, sell the paper for a big commission and if it went bad, it was someone elses problem. Wall Stree greed and the rating services that were suposed to place an honest value on the worth and risk of these loans are to blame, and of couse the Bush administraion that gutted financial ovesight.

[Lee]

What is amusing to me is that we had two opportunities to put intelligent, competent leadership in charge of the administration in Washington. We were all sold out by the poorly educated Nascar voters who voted for a guy that they "would like to have a beer with". Well, take a good look at the economy and the 40 billion per month we are spending on jobs programs and roads in Iraq, largest decline in RE in 75 years, $4.00 a gal for gas, rising food costs, record foreclosures, rapidly declining dollar and a budget deficit 10 times the size of the surplus that was left to this pres. and congratulate yourselves! You got just what you deserved. Maybe this time enough people will vote intelligently.

[DC]

Sorry, Banker, but that wealth IS real - as real as the FIAT its based upon. If it can be used to buy, sell, trade... its as real as anything else.

AND, whats going to happen with the trickle downs already ocurring with home equity drying up? Im looking forward to a real steal on college tuition.

The house is no longer a pool for cheap H.E. loans for home improvement (stupid - paying to fix someone elses house up? - not me!) and college loans.

Ill be glad to see the scam called " you have to have a 4 year degree and mountain of debt to get a job to go more into debt" come to an end.

Im not waiting to buy A house, Im looking to buy 2 or 3... Living like a dog is going to pay off.

[mike burns]

A few years ago, Congress and regulators were holding hearings and "encouraging" banks to loan to more poor people. They were crying that housing prices were too high for people to afford.

Now prices have dropped and they're whining that prices are too low. As a renter, I'm happy to see prices dropping a little, but they're still much higher than they were in 2000.

[Mike W]

Wealth didn't disappear. Home prices rose mostly due to fraud and crazy speculation not from fundamentals. Like stocks, it's merely paper gains until one secures his profit by selling. However, there was a redistribution of wealth that went on. Borrowers and lenders, participating at or near the top and left holding the bag, transferred a lot of their wealth over to sellers, brokers, agents, assessors, etc.

IMO CPER is wrong in claiming the bubble will be gone by the end of 2008. Typically, it takes 5 to 6 years to reach bottom after a housing bubble bursts. By the end of this year, homes will still be UNAFFORDABLE to the average person. Until we return back to the historic trend line, prices will continue to fall. We probably will see them drop to 1998/1999 levels. All fraud-fueled bubbles undershoot. This one will be no different. Don't count on seeing a bottom until 2010 at the earliest.

[Wolfgang]

Why hasn't anyone asked the obvious question? If housing prices are declining - and are projected to continue to decline - does that also mean a decline in real estate taxes? After all, the tax is based on assessed valuation. If the value goes down, then the tax has to go down, n'est pas? Does that mean that municipal government is going to have to leave within its means? Or more properly does that mean that municipal government will have to go back to the homeowners and ask, through referenda, for tax increases since they won't be able to hide behind the automatic increase through the assessed valuation process?

[MyLessThanPrimeBeef]

First, it's topless - 'Prices will just keep going up. I don't foresee a top, ever.'

Then, it's bottomless. They can't see a bottom now.

If you watch carefully, you will see this porno is getting darker...lots of pain, the S&M variety, because the director is one very sick guy.

But, it's not really well made. These amateur porno actors have no self control; they keep going off prematurely, from the very beginning of the shoot to even now, jumping into the 'relief rally' too soon, vulturing too early.