Let’s keep in mind in this thread the difference between stocks and flows. Your net worth is a stock concept–assets minus liabilities at a certain point in time. Your personal balance sheet. It is one measure of well-being. Another is measured by two flows over a period of time, such as a year or a month. Income minus expenses = saving (which can also be negative–dissaving). A year’s worth of saving is added to your net worth (or subtracted in the event of dissaving).
During the housing bubble years, many people’s net worth was ballooning because of the increase in their house value. If they extracted this gain via HELOCs, their spending went up accordingly, giving them the illusion they were doing well and could afford to ratchet up their spending. New consumption habits were hard to curb when the values stopped going up, making the return to spending no more than one’s income extra difficult. All this is well known to long-time Piggs.
What’s made this housing decline have such a negative impact on the economy is the subsequent decline in housing values, decimating the homeowner’s net worth. They correctly feel poorer and must cut back more than normal on their expenses to build back their balance sheet. That largely explain the economy’s lingering weakness–housing values must stop falling for a real recovery to take hold.
