The housing boom didn't just make Americans rich on paper. It padded our expense accounts. In the process, it goosed economic growth.
How?
Through "mortgage equity withdrawal"...the use of one's house as an ATM machine. In the years in which house prices rose 10%+ per year, Americans didn't just let that extra wealth sit around unused. They took it out and spent it (often on home improvements and downpayments on additional houses).
Now that house prices have fallen nearly 30%, however, the source of that cash--home equity--has, in many cases, evaporated. So we've stopped making mortgage equity withdrawals. As a consequence, we've stopped spending the money we used to take out of our home ATMs.
At the peak of the housing boom, MEW was putting $500 billion a year in our pockets. Some of that might have gone to debt reduction, but most of it was likely spent.
Unless/until house prices miraculously start heading skyward again--which is unlikely to happen for a couple more years, and then only from a significantly lower level--the big MEW-fueled spending is gone for good. So say goodbye to about 3% of GDP.
Here's a chart from Calculated Risk that shows mortage equity withdrawal by quarter for the last 15 years:
And here's a chart from John Mauldin showing what GDP would have been for early part of this century without mortgage equity withdrawals. If not for the home ATM, GDP would have declined for two years in the last recession.
This highlights the biggest difference between then and now: Back then (2001), we had home equity to borrow against to fund spending that our incomes didn't cover. Now, we don't.
