Tuesday, April 10, 2012

Household Equity Recovery: Waiting for the Paint to Dry

The Lehmann Letter (SM)

This letter has often expressed a "this time it's different" theme when discussing the painfully slow recovery. The reason: The massive asset deflation that instigated the recession and hampers the recovery.

Along these lines, Sunday's New York Times carried an editorial that deserves your attention:


Note especially the two charts accompanying the article.

The first chart shows how difficult it is to restore full employment following a severe recession. Unemployment rose to over 10% in the 1981-82 recession and it took four years to recover from the consequent job loss and keep up with labor-force growth. And that was a classic V-shaped recovery. Unemployment rose far less during the 1991 recession but job recovery took just as long because of a weak post-recession expansion. The article asserts that job recovery remained incomplete after the 2001 recession and estimates it will take 10 years to recoup from the recent recession. This pessimistic assessment fits well with everyday observations of the slow recovery.

But it's the second chart that's an even bigger eye-opener. It shows average home equity per homeowner in 2011 (inflation-adjusted) dollars. Home equity per homeowner doubled from approximately $100,000 to $200,000 from the late 1990s to 2007. Then it collapsed and fell to roughly $80,000: About where it was in the late 1960s. This illustrates the one-two punch of falling home prices and rising mortgage debt. The asset deflation wiped out the previous boom's home-equity gains.

It also illustrates this expansion's key constraint: Households are hampered by balance sheets with diminished equity, excessive debt and inadequate liquidity. How can consumers, under those circumstances, restore and repair their balance sheets by spending and borrowing less AND AT THE SAME TIME stimulate the economy by borrowing and spending more?

That's why the recovery and expansion is so slow. Once you've painted yourself into a corner, it takes a long time for the paint to dry before you can walk away.

(To be fully informed visit http://www.beyourowneconomist.com/)

© 2012 Michael B. Lehmann

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