The U.S. Great Recession Experience. The Reasons why Losses in Jobs and in Home Equity Savings reinforced each other

In a previous paper: “Quantitative Easing Home Equity: an Alternative Economic Management Tool” (MPRA Paper 106528), the writer did analyze some of the Great Recession’s experiences for different groups of U.S. households. In Q4 2005, the home equity level stood at $14.4 trillion for all households. As a result of the Great Recession this level dropped to $8.2 trillion by Q1 2012. This loss in wealth level lasted the longest for the bottom 50% of households. For this group it took over 10 years which was nearly 5 years longer than for the two household groups making up the top 50% of households. The latter groups took five years to get back to the income and wealth levels as assessed in 2007. Why was losing $6.2 trillion in home equity savings over the period Q4 2005 to Q1 2012 such a disaster? The first aspect is the value of savings made and the recovery period to earn back such savings losses. A savings loss of 43% on home values was an extreme percentage of losses, mainly due to two factors. The first was the reinforcement factor. When doubts crept into the mortgage backed securities markets in 2007, the snowball started rolling. Banks and other financial companies as well as some households were over extended. Defaults started to go up and the mood in the markets turned from overly optimistic to severely negative. Foreclosure levels were racing up and unemployment levels increased rapidly. The second aspect was the relationship between house prices and the home equity savings levels embedded in such home values. A home is for nearly all households a necessity rather than a luxury. If a household cannot afford to buy outright, a mortgage is often needed as the household will still need a place to live in. The downward housing prices –from a U.S. average of $257,400 in Q1 2007 to the bottom of $208,400 in Q1 2009 and back to $258,400 by Q1 2013 brought on a misery for many U.S. households. This paper will attempt to show that there can be a different solution to such market upheaval: a reversal method that helps households to spend more of their home equity level when needed. The household’s macro economic motto could be: “Save in good times and spend from your home equity in economic downturns”. To make it a success, a system needs to be developed to make such spending possible.