Lost home equity by any other name (say, ‘reduced household debt service’) is still lost home equity
So, it wasn’t terribly huge news this week when the Federal Reserve released data showing that Americans’ net worth plummeted almost 40 percent from 2007 to 2010. After all, that was the worst of the Great Recession and included the bottom of the housing market. And vast amounts of home equity, most of it “on paper,” evaporated like so much disappearing ink.
Not terribly huge news, but terrible — turrible even — nonetheless.
But maybe it’s all in how you say it. Robert Bachman, chief economist for Grubb & Ellis, put it differently in his weekly Good News Friday commentary. Households, he wrote, have been “quietly deleveraging” since 2007.
Households have been deleveraging since the third quarter of 2007. The household debt service ratio (DSR), the ratio of outstanding mortgage and consumer debt to disposable personal income, ended last year’s fourth quarter at 10.9 percent, its lowest level since the second quarter of 1994. The financial obligations ratio (FOR), a broader measure that adds auto lease payments, rental payments on tenant-occupied property, homeowners’ insurance and property taxes to the DSR, ended the fourth quarter at 15.9 percent, its lowest level since the second quarter of 1984.
This rapid deleveraging has occurred in concert with steady, moderate gains in retail sales since the recession ended, suggesting that consumers have struck a balance between, on the one hand, spending for necessities and to satisfy pent-up demand, and on the other hand, putting their household balance sheets in order. This balancing act is keeping the economy afloat (consumer spending accounts for 70 percent of gross domestic product) and, at the same time, restraining the pace of the recovery – the reason it feels so unsatisfying. The global economy is at a precarious point right now, but the U.S. economy so far has been a counterbalance. With businesses easing back on their capital spending, consumers will have to carry the baton forward if the recovery is to continue. The deleveraging that has already occurred should give consumers a fighting chance to do that.
Am I missing something, or is Mr. Bachman just taking lemons and making lemonade?