The Drop in Home Equity
By Arnold Kling
Timothy Taylor has written one of his bests posts. He writes,
Through much of the 1990s, the ratio of owner’s equity to GDP fell, but in the early 1990s, that was partly a result of depressed regional real estate markets in certain states in the aftermath of the collapse of many savings and loan institutions in the late 1980s and early 1990s (which made the numerator of the ratio decline), and also a result of fast economic growth from the mid-1990s on (which made the denominator of the ratio rise). Again, the bottom line is that the spike in the total value of housing that ended around 2006 is well outside the post-World War II historical experience. And the drop since 2006 takes this ratio from by far its highest value since 1950 to by far its lowest value since 1950.
My emphasis. Read the whole thing.
To me, the central villain of the story is the rise in mortgage credit. It helped create the boom and bust in housing values. Even worse, it produced a decline in the ratio of housing equity to housing values. Even taking the house price boom-bust as given, Taylor’s equity/GDP ratio would be 50 percent higher now if lenders had not become more lenient with homebuyer leverage.