Photographer: Michael Nagle/Bloomberg

The End of the Housing Hangover

Mark Whitehouse writes editorials on global economics and finance for Bloomberg View. He covered economics for the Wall Street Journal and served as deputy bureau chief in London. He was previously the founding managing editor of Vedomosti, a Russian-language business daily.
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A giant housing-debt hangover has been one of the main culprits behind the U.S. economy's lackluster recovery from the 2008 recession. In one encouraging sign, new data from the Federal Reserve suggest that American homeowners might finally be getting out from under it.

The housing bust left U.S. homeowners in a dire state: The value of their properties plummeted, while the mortgage debt they owed didn’t. By early 2009, the difference between the two -- their equity -- had fallen to an all-time low of $6.2 trillion, or just 37 percent of home values, according to U.S. financial accounts published by the Fed. Worse, more than one in four were "underwater," meaning they owed more than their homes were worth.

Naturally, people in such a position would be in no mood to go out and spend. Economists see this as one explanation for the tepid consumption growth of the past several years. The weak demand, in turn, has held back the entire economy.

Now, though, homeowners have reached a sort of milestone -- thanks to a combination of mortgage defaults, modifications, old-fashioned thrift and a multi-year rebound in house prices. As of September, their equity stood at $12.4 trillion, or 56.7 percent of home values, the highest level since the housing bust began in mid-2006. What's more, according to data provider CoreLogic, the share of underwater owners has fallen to less than 9 percent.

Here's a chart showing equity as a share of home values over the past six decades. Note the gradual decline as mortgage availability increased over the second part of the 20th century and the severity of the 2006-2009 bust:

If the U.S. had been much more aggressive in reducing mortgage principal, as various economists and Bloomberg View advocated, homeowners could have gotten to this point much earlier. Still, better late than never.

Now the question is whether the regained housing wealth will spur people to start spending again. With tight mortgage credit preventing the kind of cash-out refinancings that characterized the boom years, equity might not be as powerful as it was. That said, the feeling of being whole again could certainly help.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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