Thursday, August 30, 2007

Are we really $70,000 richer?

According to the National Association of Realtors, since 2000 housing equity increased by $4 trillion dollars. That is equivalent to $70,000 for each household in this country. So by virtue of a crazy housing bubble, driven by greed and fear, the nation has become richer.

But hold on a second. Has this new found wealth been created by Americans becoming more productive? Have we been working harder? Do our factories have more capital equipment that can produce more goods? Of course not. It seems that we are richer because of the housing market. But what has changed in the housing market? Notwithstanding some new condos, the housing stock hasn't increased much. Nor has the quality of houses improved fundamentally. Sure, more houses have overdosed on granite and marble, but they still fulfill the same basic function. The more you think about this housing equity, the more vaporous it seems.

No one denies that the market is now rapidly cooling. Inventory is rising, sales volumes are collapsing, and in some cities, such as Phoenix and Washington DC, prices are starting to tumble. This home equity wealth, which came quickly, and will also disappear in the same dramatic fashion.

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