Husing busts are worse than stock market busts. First, almost 70% of Americans own a home, whereas mainly the middle class and rich own stocks. So the effect of a housing bust is spread among more people.
Second,the outsized impact and multiplier effect on wealth that housing has, is much bigger than the stock market. “According to the study authors (Christopher Carroll, Misuzu Otsuka and Jirka Slacalek), an increase in housing wealth of $100 will boost spending by $9. A similar increase in stock market wealth “only” creates $4 more spending.” Reverse that for the way down.
Third, the impact of MEW is HUGE. Since rates hit their lows in 2003, MEW has been responsible for more than 75% of GDP growth.
Fourth, housing start downturns lead to recessions. Every time housing starts decline more than 25%, a recession follows. Can the same be said of the stock market? I don’t know.
Fifth, 25% of all mortgages are resetting to higher interest rates next year and millions of people will lose their homes in foreclosure and become renters (or tenants with Mom and Dad).
I disagree that homeowners can cut back on expenses to avoid a 50% jump in payments. At 35% or higher debt ratios, how can you cut back enough to afford a 50% payment increase? And forget that 2nd job – it’s recession time.
I do think that people are desperate to be homeowners, so they try hard to keep their home, but they won’t be able to.
