Diary

Economics 101: Maybe people have gotten smarter?

From The Wall Street Journal:

Why the Housing Rebound Hasn’t Lifted the U.S. Economy Much

Many homeowners don’t realize they have home equity to tap, while banks have pulled back on loan amounts and other types of loans have become cheaper

By Joe Light | November 22, 2015 2:50 p.m. ET

American homeowners are finally digging out of the hole created by the housing crisis. But their housing wealth is playing a much smaller role in the overall economy than it did before the downturn.

Home equity has roughly doubled to $12.1 trillion since house prices hit bottom in 2011, according to the Federal Reserve. As a result, a key gauge of housing wealth—homeowners’ equity as a share of real-estate values—is nearing the point seen a decade ago, before the downturn.

Such a level once would have offered a double-barreled boost to the economy by providing owners with more money to tap and making them feel more flush and likely to spend. But today, that newfound wealth has had little effect on behavior. While the traditional ways Americans tap their home equity—home-equity loans, lines of credit and cash-out refinances—are higher than last year, they are still depressed.

In the first half of the year, owners borrowed $43.5 billion against their homes with home-equity loans and lines of credit, according to trade publication Inside Mortgage Finance. That was 45% higher than in the first half of 2014, but scarcely a quarter of the amount seen when equity was last as high in 2007.

Meanwhile, cash-out refinances, which let homeowners take out a new mortgage and tap some of the home’s value at the same time, were up 48% in the three months ended in August from the year-earlier period, according to Black Knight Financial Services. But they remain below the level seen in the summer of 2013. The average cash-out refinance in the three months ended in August left the borrower with mortgage debt of about 68% of the home’s value—not a risky level by any stretch.

Home equity’s effect on consumer spending is at its lowest ebb since the early 1990s, according to Moody’s Analytics. The research firm estimates that every $1 rise in home equity in the fourth quarter of 2014 would translate to about two cents of extra consumer spending over the next 1 to 1½ years. That was a third of the impact home equity had before the bust, Moody’s said.

There’s more at the link, but this was one of the worst articles I have ever read in the Journal. There wasn’t a single word, not even the slightest hint, other than saying that homeowners might be more “conservative” today, that homeowners might have learned from the last recession that going overboard on home equity loans was a prescription for disaster.

The comments by Journal readers on this article were not exactly kind, but Mr Light’s article exemplified the thinking of the Obama Administration during the early part of the recession and the mark-up of the 2009 stimulus bill: the assumption was, and remains, that consumers would, and should, behave the same way after the recession as they did prior to the housing crash. Instead, as we have noted previously, Americans who could increased their rates of savings, and even though banks had plenty of money to lend, the very low interest rates pushed by the Federal Reserve still did not lead to as much borrowing as the government wanted to see.

Why, it is almost as though Americans had learned their lessons — albeit, the hard way for too many of them — that they ought to behave more responsibly with their economic decisions.

And this is why the government has proved to be such a poor leader of the economy: while Our Betters have decided the way that people should behave in their economic decisions, we commoners don’t always do what they say we should do.
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Cross-posted on The First Street Journal.