The housing bust is officially over.
Nine years ago, the total value of housing in the United States hit $25 trillion. Then home values started to plunge, foreclosures began to mount and a nasty recession pushed the homeownership rate to the lowest level in 30 years.
The housing bust wiped out about $7 trillion worth of ordinary Americans’ net worth—but the damage has finally been repaired. The Federal Reserve says the total value of Americans’ homes hit $25.3 trillion in the fourth quarter of 2015. That’s about $450 billion more than in the prior quarter, and a new high. Nine years after home values starting falling in 2006, the sector has finally regained its losses, as this chart shows:
It took a remarkably long time for housing wealth to get back to break-even. Financial markets recovered much faster, with total financial assets peaking at $54.3 trillion in 2007, bottoming out at $45.8 trillion in 2009, and hitting a new high of $55.1 trillion in 2011. Investors recovered all their lost financial wealth in just over four years. Today, total financial assets stand at $66.9 trillion, 23% above the prior peak. That partly reflects the Fed’s aggressive monetary stimulus policies, which pushed up stock values a lot faster than home values.
Housing has been so slow to recover for a number of reasons. The value of homes, like the value of everything, is determined by supply and demand. And demand collapsed during and after the recession, as lending standards tightened and widespread unemployment cut into income and savings. As a debt binge unwound, many consumers found themselves owing far too much to afford a home or qualify for a mortgage. And the foreclosure epidemic left many people with wrecked credit and low odds of owning again any time soon.
Housing isn’t completely back to normal. The Case-Shiller national home-price index is still slightly below its 2006 peak, so while the total net worth of homes is at a new high, the average price of a home is still about 5% below the all-time high, according to the index. That indicates more homes with a higher total value, but a slightly lower average price.
The sales pace of both new and existing homes is still below historical averages, with young buyers waiting far longer to purchase a first home. Part of the problem is a shortage of starter homes, a result of fewer people upgrading from their first home to a larger second one. And median household income, adjusted for inflation, is still slightly below where it was in 2000, showing that ordinary families remain under financial stress.
But rising home values and improving net worth are an important part of the solution. As home values increase, owners who might have been under water a few years ago -- owing more than their home was worth -- will rise above the water line and be able to sell without losing money. That will boost the inventory of homes for sale and make room for more first-time buyers. A more stable housing market, in turn, makes the overall economy stronger, banks more willing to lend, and consumers a bit cheerier. It’s about time.
Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman .