Housing’s ‘Poverty Effect’ Fouls Up U.S. Rebound: John F. Wasik

Photographer: Laura Segall/Bloomberg

Brush grows in a vacant lot in an unfinished housing development in Chandler, Arizona, Feb. 1, 2009. Close

Brush grows in a vacant lot in an unfinished housing development in Chandler, Arizona, Feb. 1, 2009.

Photographer: Laura Segall/Bloomberg

Brush grows in a vacant lot in an unfinished housing development in Chandler, Arizona, Feb. 1, 2009.

The loss of some $7 trillion in household wealth is an albatross around the neck of the economy.

This dour effect is clipping a robust recovery. Millions who have little or negative home equity are shackled to houses they can’t sell and a debt burden that keeps them from moving ahead. They can’t save, either, although they desperately need to boost their cash reserves.

Not a week goes by when I don’t hear from a friend or neighbor who can’t sell their home or get a decent price for it. They were counting on the proceeds to fund retirement or simply get on with their lives and careers. They weren’t planning to go out and buy boats and big-screen TVs. Most Americans are suffering from the opposite of the wealth effect: a creeping sense of poverty.

The loss is about $54,000 per home if you average out the $7 trillion among 130 million U.S. housing units (including rentals), according to an estimate by the economic blog http://www.newobservations.net, based on Federal Reserve data.

Growing unemployment, stagnant wages and diminished home equity are weighing even more on those who may join the ranks of the foreclosed. The delinquency rate on U.S. mortgages -- those falling behind on payments -- reached a record in the first half of the year, according to the Mortgage Bankers Association, a trade group in Washington.

Debt Burden

The current deleveraging is paring consumer spending as buyers are borrowing less for everything. They don’t feel wealthy either since their retirement funds were clobbered during the last bear market.

Lost home equity not only represented diminished wealth, it hurt confidence in the future.

The house poor can’t borrow against their homes because they have tapped out the equity or don’t have enough of a stake to leverage against. Most of them can’t even refinance. That means they won’t be flocking to stores to buy new appliances, financing college educations or saving enough for retirement.

Regardless of the recent positive reports on housing and the economy, it’s not surprising that attitudes to traditional wealth creation have changed.

Buying a home is no longer the guaranteed way to save and invest. In a survey by the National Foundation for Credit Counseling, almost half of those polled “no longer believe that the American dream of homeownership was a realistic way of building wealth.”

More Alarming Trends

The more alarming trend is that mortgage defaults are rising fastest for those holding prime, fixed-rate loans, the Mortgage Bankers Association says. These aren’t the dodgy subprime mortgages made to people with questionable credit and income histories. These folks were supposed to be the industry’s most creditworthy customers.

If unemployment grows and major industries continue to shrink, house poverty will ravage American households.

As many as 25 million homeowners may be better off walking away from “underwater” mortgages that exceed home values.

Credit-card bills compound the misery. Anchored with more than $2.5 trillion in total consumer debt, Americans are working through a negative wealth whammy rivaled only by the 1930s.

Banks are pinching even more by tightening credit, even to qualified borrowers. While a new U.S. consumer credit protection law that went into effect Aug. 20 will give you 45 days’ notice of a finance charge increase, banks are still free to make terms more restrictive and raise rates sky high.

Going Forward

Being credit-challenged isn’t such a bad thing, though. We have reached a turning point in this crisis that compels people to do some saving and curb unbridled consumption and debt.

Credit-averse Americans are building up their cash in vehicles such as government-insured certificates of deposit, money-market funds, and highly rated short-term corporate and municipal bonds.

Yet the U.S. government still doesn’t get the big picture and indirectly discourages savings, which can ultimately create a pool of capital for lending, infrastructure improvements and small business lending.

U.S. savings and non-municipal bond interest are still taxed as ordinary income at the highest personal rates.

What’s wrong with this policy? You can’t have a healthy economy without a wealth effect. In lieu of easily tapped credit, people won’t spend freely unless they have a cash -- or employment -- cushion.

Since we can’t depend on real estate as a prime wealth creator -- especially in an age of deleveraging -- Congress needs to promote tax-free savings and rebuilding home equity if it wants a meaningful economic rebound. Otherwise the poverty effect will continue to foul up the recovery.

(John F. Wasik, author of “The Audacity of Help,” is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: John F. Wasik in Chicago at jwasik@bloomberg.net.

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