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This chart shows the tangible real estate household assets. Be warned that I've set the left scale's starting point at 100% (vs. 0%) so that more detail can be seen. In order to get the black line back down to the long-term exponential trend line either real estate asset prices must come down (presumably through deflation) and/or personal disposable incomes must go up (presumably through inflation). Heaven help us all if they both come down (recession?). That wouldn't necessarily help improve this picture much, unless real estate prices came down much faster than disposable incomes.
Further, there is no guarantee that the exponential growth is even sustainable. Japan found that out the hard way when their population stopped growing.
Please note the change in behavior in the chart once we fell off the gold standard in the early 1970s.
This stacked chart shows where the value of our homes lie. As a current homeowner, I'm of the belief that structures are depreciating assets. They should therefore not keep up with inflation unless you are willing to continually pump money into them (repaint the house, replace the carpets, roof, windows, and so on). It would make sense that the land itself is continually worth more though, assuming the population continues to grow.
The thing that most strikes me about the chart is that as the land became more expensive, we opted to put more expensive houses on it. In other words, we somehow rationalized that we could have our cake and eat it too. It is the same thing we heckle our government about. When given the choice between more expensive land and more expensive structures, we opted for both! It doesn't stop there though. If you've got a nice chunk of land and a nice house on top of it, might just as well park a few nice cars in the driveway, right? In relation to the price of homes these days, luxury cars are cheap apparently.
How did we pull that little trick off? Inquiring minds want to know!
The best way to look at this stacked chart might be to start at the bottom. First is the mortgage debt. That alone should make people cringe. I've added on consumer credit (which may or may not be appropriate depending on how you want to look at it). The remaining amount I'm calling the equity in the house. As can be seen in the chart, we have really embraced debt.
Here's something else that should make people cringe. Not all homeowners have embraced debt. There's a good chunk of the population that has their house paid off. That means the potential pain seen above is potentially concentrated.
Here's another thing that should make people cringe. Median incomes have not kept up with inflation during this housing boom. The richest among us are pulling up the averages. Can the median homeowner really afford the median home? I'm thinking the answer could turn out to be no. If so, that will pose great problems for Bernanke's magical prosperity printing press. Inflation isn't going to solve a problem of affordability. In my opinion, inflation makes it worse.
Picture what's going to happen to that chart if home prices drop 15%. The word ugly does not do it justice. Much of the damage would be immediately inflicted on the green section. The yellow and red sections could also take damage though, especially if the bankruptcy word becomes popular once again.
Normally I'd look at these charts and want to scream deflation at the top of my lungs. I guess we'll see just how much yellow and red pain Bernanke and our government are willing to allow. Bankruptcy is not the only "b" word that comes to mind. Bailout and banks do as well.
You will note that I was a good American in these charts. I didn't attempt to work in our rising national debt. Let's just continue to ignore that problem since we're not really sent a bill for that directly. It just shows up in the price of oil sometimes and may bleed over into food. Who knows!
See Also:
Calculated Risk: Fed: Existing Household Real Estate Assets Decline $67 Billion in Q3
Source Data:
FRB: Flow of Funds
