$20 Trillion in Housing Wealth at Risk: The Potential Fall of the U.S. Housing Market.

Current estimates put American residential wealth at $20.66 billion. This is an incredibly large number and that is why even the relatively small percentage decline in prices last year has put the entire economy at risk. According to the Case-Shiller Index which tracks 20 metropolitan areas in the United States, the index is now down 7.8% on a year over year basis. The benefit of the Case-Shiller Index is that it tracks the sale of individual homes over time to get a more accurate representation of the current market than say comparable sales which is the typical appraiser standard of measuring homes. For example, an appraiser will normally look at 3 homes that have recently sold in your immediate area and divide the sales price to the square footage of the home. Of course this is similar to driving forward looking backwards.There have been recent estimates that real estate nationwide is expected to fall another 20 to 30 percent. This is a major contributing factor to the downturn because this is how much wealth will be wiped out:

Percent Drop Residential Wealth Residential Wealth After Drop Amount of Loss
7.8% $20.66 trillion $19 trillion $1.6 trillion
15% $20.66 trillion $17.56 trillion $3.099 trillion
20% $20.66 trillion $16.528 trillion $4.132 trillion
25% $20.66 trillion $15.495 trillion $5.165 trillion
30% $20.66 trillion $14.462 trillion $6.198 trillion
35% $20.66 trillion $13.429 trillion $7.231 trillion

National housing wealth has already fallen over $1 trillion in value over the past year. Just so you have a frame of reference how big this is, from March 200 to October 2002 during the dot-com bubble crash $5 trillion was wiped out from technology companies. Keep in mind that the above figures only account for the United States and as we are well aware, there are multiple housing bubbles across the globe from Sydney to London to Barcelona. All these areas will have similar fates as the contraction in credit continues to bare down. We are all connected at the hip and the idea that real estate always goes up is quickly coming into question.

There are now efforts on the way to attempt a bailout of certain sectors of the housing market. Rate freezes. Making credit cheaper. Or even assistance. Yet these all hinge on models that assume home owners want to stay in their homes. 60 Minutes aired a piece were a couple was more than willing to walk away from their home now that it wasn’t appreciating. The collateralizing debt has become such an impersonal transaction that housing is no longer holding an emotional attachment of the past and people are willing to throw in the keys. Homes have become commodities to be sold with no after thought.

With that said, we are also a nation that depends mightily on real estate. I heard a story of a notary and escrow officer that were having a hard time paying their home in central California now that the market has tightened. These people not only cannot pay for their homes, but they no longer can consume in the economy thus creating what we are now seeing in the service sectors. This pushes the tax base lower and it also forces prices even lower. So the above numbers dwarf the dot-com bust but there will be more ramifications since 70 percent of United States households own real estate.

We are only in the first inning of this housing downturn and $20 trillion is a lot to have on the dinner table.

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3 Comments on this post

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  1. » The Scariest Graph Ever: Home Mortgage Debt and Consumer Credit. wrote:

    […] debt is an astounding $13 trillion. Given that all residential housing in the US is valued in the ballpark of $20 trillion, any moderate declines will put a damper on housing prices while maintaining the enormous amount of […]

    February 25th, 2008 at 9:18 pm
  2. Rebate Checks Go Out Tonight: Too Little Too Late. » My Budget 360 wrote:

    […] is too little too late given the current housing debacle which has already erased $2 trillion in equity. Do people really think that this is going to stop people walking away from mortgage […]

    April 28th, 2008 at 11:43 am
  1. charles kuchar said:

    i’m 65 and my grandpa says to prepare for this day. he had debt and lost a lot of oil land in the depression. so i have avoided debt all my life. every one said, get a credit card, open a checking account, etc. didn’t do any of them things and now i see that i am wiser than the big guys. and i have learned how to make the best beer in town. checkers at the grocery store asked for more yesterday. picked the new hops yesterday also and when they get dried, a new batch will be in progress. charlie

    July 18th, 2008 at 5:43 pm

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