We all like to worry about the state of the U.S. housing market, and how its continued weakness is a problem for the U.S. going forward.
Yet perhaps this thinking remains stuck in the housing bubble mentality, since housing is a far smaller portion of U.S. net worth these days according to Citi:
Citi’s Tobias Levkovich:
In recent weeks, a so-called “foreclosuregate” has emerged with investors worrying that a new round of home price declines could further threaten what many already fear is a weak economic recovery that could slide back into recession. Calls for a moratorium on foreclosures have come out given apparent mistakes made by some banks amidst documentation challenges due to the structures of securitization and electronic filing systems that make finding the original paperwork very difficult. Yet, one needs to take a step back and consider what has transpired in the last few years within the housing data. Furthermore, the relative importance of housing to the consumer has been highly exaggerated, in our opinion.
For instance, if one looks at the rise in net real estate value within the household sector, it shows that home equity climbed almost $10 trillion from 1997 through to 2007, when overall household net worth surged roughly $35 trillion in the same time period (see Figures 1 and 2). Thus, less than 30% of the wealth creation could be attributed to housing but many think that it delivered better than 100% of the wealth. In addition, from 2002 through 2007, the wealth generation from housing was only $2.6 trillion versus overall net worth soaring $23.0 trillion over those years.
The lowest contribution to net worth in nearly 60 years:
Accordingly, there are some serious misperceptions out in investor land that need adjusting. Indeed, home equity reflects only about 16% of overall net worth currently, down from its high of over 25% in 2006 (see Figure 3), and at its lowest level in almost 60 years, highlighting that the bulk of wealth is elsewhere including portfolios of stock, bonds, life insurance policies, pension programs and mutual funds.
The upshot is that a lot of U.S. wealth creation has happened beyond housing, note in one of the charts above how despite the recent crisis, U.S. household net worth has still increased about 25%.
(Via Citi, Home A-Loan II, Tobias Levkovich, 29 October 2010)