Real estate bubbles happen all the time around the global. As we continue to see in Australia and China today, the experience of the US real estate market does not necessarily translate to other markets. The charts below shows the before and after impacts on the economy from US real estate bubbles.
Collapse in US housing Starts – lost construction jobs
Chart above shows the severity of housing construction decline as result of deflation of the housing bubble. Housing start experienced a fall of almost 60% from peak to trough which result in almost halving of those employed in the construction sector from the peak.
US house price crash – what goes up must come down
The Case-Shiller index shows the trend of residential real estate price in the US on an absolute level basis. The spike in the period from 2002 to 2004 shows the extent of the rise and the rate of the subsequent fall afterwards.
The residential stock added during the boom period did not go anywhere and dragged down the oversupplied market such as Phoenix, other sun belt states and Florida and depressed prices for a number of year afterwards.
Finally the chart below shows the annual year on year changes in house prices. In percentage terms, the collapse in prices following the boom wiped out all of the gains from the previous cycle. The net result is that the residential housing values in 2008 is almost the same as 2002. This coupled with high leverage and interest does not mean a break even over 5 years but significant equity losses.
Broadly the collapse of the house housing market led to the great recession rather than the recession caused the collapse in asset values.
Long Term Household Wealth Impact
Any collapse of real estate bubbles will have long term implication on household net worth. High net worth households diversify their investments across equities, fixed income and real estate but the for the middle class equity in homes makes up a large portion of their net worth.
Any deflation in house prices has long term net wealth impact but the burden is disproportionately felt on medium and low income households.
WSJ highlights the dichotomy of the impact between generations pre and post the real estate bubbles. Older generation have more equity in houses than younger investors mostly due to the time in the market. It is clear from the chart that the run up in net worth from early to late 2000 was due to the US real estate bubble. The fall in US house prices coupled with leverage actually made investors worse off.