Why the Housing Bubble is to Blame for the Stagnant Economic Recovery

There’s no question in anyone’s mind as to whether the housing bubble is at least partly to blame for the economic crisis that we still find ourselves in as recovery continues to stagnate. But to what extent?

Rex Nutting at MarketWatch offers 3 reasons our economy has been slow to recover, and why we’re in this mess in the first place:

  • Americans lost $7.38 trillion when the housing (NYSE:IYR) bubble burst and housing prices plummeted 30% nationwide, with many losing more because their homes were heavily leveraged. On average, American homeowners lost 55% of the wealth in their homes, and for most middle-class Americans, about 90% of their assets were in their homes, meaning they lost about half of their total wealth when the housing market crashed.
  • The middle class’s share of the nation’s wealth has been decreasing for decades. In the 1960s, 20% of families right in the middle were earning 17.5% of the total income in the U.S., but today that same 20% of families is only earning 14.6% of all income. At the same time, the top 5% went from earning 17% of the national income in the 1960s to 22% today.
  • The housing (NYSE:IYR) boom was the only thing keeping our economy growing. Between 2003 and 2007, the economy grew at an annual average rate of 2.7%, but 0.7% of that was from housing, and without it, growth would have been near 2%, which is considered stagnation as it doesn’t even keep pace with population growth. And now that the housing market has collapsed, pushing down the economy, instead of putting more money into consumer products to bolster the economy, Americans have put $1.3 trillion into their homes rather than taking money out. People are trying to pay down mortgages and credit cards rather than spending on other things. And with consumer spending down, that 2% is declining into negative growth territory.

Although unwinding the debt bubble is also a huge issue, Rex offers interesting points to consider if we plan to resurrect a healthy middle class in the US.