The Worst Economic Statistic Yet

The Global Works Foundation reported a startling statistic last week. Between 2007 and 2011, the equity that U.S. families had in their homes declined from $12.9 trillion to $6.2 trillion. In other words, 52 percent of all home equity in the U.S. disappeared over the last four years.

What that means in practical terms is that the asset many homeowners were counting on to cover retirement costs or put the kids through college no longer exists. They therefore must stop spending money and start saving like never before. Thus, consumption is likely to remain weak for a long time to come, and the economy may barely grow at all for years.

What it means in policy terms is that additional stimulative spending by the federal government is unlikely to jump-start the economy unless accompanied by a recovery of housing prices. The government will therefore have to look elsewhere for ways of creating jobs, for example by cracking down on the predatory trade practices of other countries that have put U.S. products at a disadvantage both at home and abroad.

The home-equity numbers first appeared in the Federal Reserve’s quarterly “Flow of Funds” report (Table B.100, line 49). The commentary highlighting the trend can be found at the Global Works website.