Home equity and wealth have recovered from the crisis nationally - but not everywhere.
Market Watch - Andrea Riquier - 19 December 2016
The quarterly economic treasure trove known as the Federal Reserve’s financial accounts of the United States, released in early December, painted a rosy picture of Americans’ finances. Household net worth rose to a new all-time high and home equity rose to just a hair below its level in 2006, before the housing bubble burst, the Federal Reserve data showed.
But missing from the 200 pages of statistics is another story: one that goes much deeper than the usual caveats about national level data failing to capture the granular detail in the real economy lived by ordinary Americans.
“It’s two markets,” Redfin Chief Economist Nela Richardson told MarketWatch.
“There’s some homeowners doing well but there’s a hollowed-out middle class and the homeownership rate is at historical lows. There are some enjoying record levels of equity and some who are locked out altogether. There’s another class who aren’t underwater but are hovering around break-even and weren’t able to refinance.”
Sam Khater, deputy chief economist for CoreLogic, agrees. “What’s unusual about this recovery is that it’s been lopsided. Wealth — home equity and financial equity — have recovered. Incomes have not. One-half of all households have participated in the massive run-up of stocks, two-thirds have participated in the gains from home ownership. The flip side is the inverse, the people who have not participated. How has their recovery been?”
For economists like Richardson and Khater, the Fed’s data does confirm some of the type of recovery housing watchers could only dream about in the depths of the financial crisis.
Most importantly, nationwide home equity has nearly recovered, but mortgage debt levels haven’t, a signal that the housing market isn’t allowing lots of borrowers to become as dangerously leveraged as during the bubble years.
But while that’s healthy for the overall market, it may mask the many ways individual homeowners and micro economies are being stifled.
It’s worth noting that nearly 4 million homeowners are still in negative equity, according to CoreLogic data.
Also, as Regions chief economist Richard Moody pointed out in a research note, 30% of all owner-occupied households have no mortgage debt at all, meaning that the 50 million households that do have mortgages have less than the 57% equity that’s presented in the flow of funds data roll-up.
Richardson believes some of the twists the mortgage market has taken in trying to address the new reality may not be having the intended effect.
Redfin agents find that low-down payment mortgages are often going not to lower-income people, but high earners who simply don’t have enough savings scraped together yet — or have savings offset by massive levels of student debt, like early-career doctors and lawyers.
That means lower-income people for whom those products would be ideal must compete with buyers who have other advantages, Richardson said.
And CoreLogic data shows fewer people with lower credit scores even bothering to apply, Khater said. He believes the impacts of the financial crisis and economic downturn scarred many Americans emotionally – and that’s not going to heal itself any time soon.
“We’ll have a long tail to the most recent recession. It will have a legacy. It will linger in our minds.”
That malaise is part of the reason neither economist is optimistic that rising levels of home equity will translate into stronger consumer spending, as it has in the past.
With mortgage rates surging, there’s no reason for anyone to do a cash-out refinance, Richardson said, although there is evidence that people with higher levels of home equity are tapping it for lines of credit, especially to make big upgrades to their property.
And Khater’s research suggests the “wealth effect,” the psychological impact that causes higher asset prices to spur more spending, has always been weaker than economists forecast, and even more so in this recovery.
“The bulk of consumer spending is out of income, not home equity,” Khater said. “That’s why we’ve had such a weak economic recovery.”
Nearly a decade after the financial crisis, so much attention has been focused on cleaning up that mess and preventing another one that policymakers, analysts and investors may miss other developments, Richardson said.
There are long-term trends at work, like the aging of the baby boomers and the automation of the workforce, even as the housing market and economy remains deeply bifurcated.
“This isn’t a problem for the finance community writ large but it is a problem for Americans in real cities,” Richardson said. “Rising inequality will become a finance problem issue eventually. This is a time to be watchful because we’re seeing an economy shifting in unpredictable ways.”