Max Fraad Wolff
Life in the Bubble: House Prices and Net WorthPosted August 10, 2007 | 04:47 PM (EST)
As of April 2007 total household debt stood at $13.432 trillion dollars. This statistic and many to follow, come from the Federal Reserve Board's Z1-Flow of Funds
Publication. 1 Total debt includes mortgage borrowing, car loans, credit card debt and all other reported forms of bank, credit union and financial borrowing. Over the last 10 years the average growth in household debt was 9.3% per year. Total household assets stand at $69.608 trillions. This includes real estate- $22.874 trillions- stocks, bonds, bank accounts, mutual funds, pensions, consumer durable goods. This gives American households a net worth of $56.175 trillions. Net worth is calculated by summing all assets and subtracting the summation of all liabilities. That works out to $187, 250 in net worth for each of the 300 million Americans. At first glance this appears a picture of flabbergasting affluence. When reporters handle this information, wealthy America tends to be their message. The wealth of America is both vast and impressive.
What gets lost in the story? How did we arrive at a point of falling stock markets, declining house prices, rising debt and general turmoil? Part of the answer lies in the problem of valuing assets that move rapidly in price. Way back in 2002 our net worth was a relatively paltry $38.8 trillion dollars. That is just 69% of today's grand total. We have increased the value of our houses by $7.1 trillions in those short 5 years. Across the same period we added $13 trillion in value to our financial assets and $4 trillion in the value of the assets in our pensions. On paper that is! Most of these changes in value are really just changes in price. Thus, asset price inflation made us "rich", on paper, and pushed pundits to pronounce economic health, banks to lend and folks to spend, spend, spend. Here is where complication enters the picture.
These years of rapidly and magically expanding wealth were furnished, in large part, be easy access to huge volumes of credit on great terms. People borrowed and spent. More money chased the houses and assets available and bid up the prices. This showed up as rising value of assets. As prices increased confidence in future price gains grew. More was borrowed and further bid up prices. Fear and risk were banished as more and more debt chased up asset prices. That is how bubbles form. All that borrowed money showed up as rising debt too. We borrowed an additional $3.85 trillion in home mortgages from 2002-2007. A 64% increase in mortgage debt bought us a 52% increase in the value of real estate. This suggests trouble. We should have gotten more growth in assets to compensate for all that extra debt. Some of the bloom is off the rose. It gets more complex, bare with me. All that money we borrowed, the extra $3.85 trillion, has to be paid back. It has to be paid back on time and with interest or you get what is happening now, mortgage defaults. .....(more)
The complete piece is at: http://www.huffingtonpost.com/max-fraad-wolff/life-in-the-bubble-house_b_59988.html