house of debt_ how they (and yo - amir sufi

[...]... $10,000 of home equity from 2006 to 2009 The mortgage of Household D remained worth $80,000 Household N owns the mortgage, but there is no change in its value Therefore, both households saw a total drop in their wealth of $10,000 driven completely by the change in home equity Household D has remaining net worth of $10,000, whereas Household N has remaining net worth of $170,000, comprised of $90,000 of. .. business interests a household owns Net worth is defined to be financial assets plus housing assets, minus any debt Mortgages and home-equity debt are by far the most important components of household debt, making up 80 percent of all household debt as of 2006 In 2007 there were dramatic differences across U.S households in both the composition of net worth and leverage (amount of debt) Home owners... Small net-worth-decline counties were also widespread across the country Large net-worth-decline counties lost an average of 26 percent of net worth, while small net-worth-decline counties lost almost exactly 0 percent Recall that the decline in net worth coming from the housing crash can be decomposed into two factors: the decline in house prices and the leverage multiplier As a result, areas of the... dramatic effect on house prices In the absence of debt, there would have been no foreclosures, and house prices would not have fallen as much as they did We will quantify the effect of foreclosures on spending later in the book, but the important point is that we cannot treat the decline in house prices as independent of debt Second, in the pure housing-wealth-effect view, the distribution of net worth is... and household N had no mortgage at all So in 2006, household D had a home equity of $20,000 and a leverage ratio of 80 percent Household N had a home equity of $100,000, a leverage ratio of 0 percent, and a financial asset (the mortgage) worth $80,000 From 2006 to 2009, house prices in their neighborhood fell 10 percent, or $10,000 So in 2009, both Household D and N had a home worth $90,000 instead of. .. the household-debt patterns that preceded the banking crises To shed some light on the household-debt patterns, Moritz Schularick and Alan Taylor put together an excellent data set that covers all of these episodes except Finland In the remaining four, the banking crises emphasized by Reinhart and Rogoff were all preceded by large run-ups in private-debt burdens (By private debt, we mean the debt of households... economy is roughly $14 trillion Given such a massive hit, the net worth of home owners obviously suffered But what was the distribution of those losses: how worse off were borrowers, actually? Let’s start with an examination of the net-worth distribution in the United States in 2007.1 A household’s net worth is composed of two main types of assets: financial assets and housing assets Financial assets include... much larger percentage decline in net worth even for the same percentage decline in house prices Large net-worth-decline counties were not just counties where house prices collapsed Instead, they were counties that had a combination of high debt levels and a collapse in house prices From 2006 to 2009, large net-worth-decline counties cut back on consumption by almost 20 percent This was massive To put... groundbreaking research of Reinhart and Rogoff demonstrates that they are associated with the most severe economic downturns.18 While banking crises may be acute events that capture people’s attention, we must also recognize the run-ups in household debt that precede them Which aspect of a financial crisis is more important in determining the severity of a recession: the run-up in private-debt burdens or... The collapse in house prices would be disastrous for household spending regardless of which households bear the loss As we outlined in the previous chapter, debt concentrates the losses on those with the least net worth This begs the question: Does the fact that debt forces losses on the lowest net-worth borrowers amplify the effect of house- price declines on spending? In the pure housing-wealtheffect . 5 ISBN-13: 97 8-0 -2 2 6-0 819 4-6 (cloth) ISBN-13: 97 8-0 -2 2 6-1 386 4-0 (e-book) DOI: 10.7208/chicago/9780226138640.001.0001 Library of Congress Cataloging-in-Publication Data Mian, Atif, 1975– author. House. w0 h0" alt="" House of Debt House of Debt How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again Atif Mian and Amir Sufi The University of Chicago Press Chicago. shows the U.S. household debt- to-income ratio from 1950 to 2010. Debt rose steadily to 2000, then there was a sharp change. Using a longer historical pattern (based on the household -debt- to-GDP