Guest Post: $6.5 Trillion Lost, One House At A Time

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

$6.5 Trillion Lost, One House At A Time

The $6.5 trillion lost in the bursting of the housing bubble is not a "paper loss," it is tragically real.

Is anyone surprised that housing continues to slide? According to this report, Home Market Takes a Tumble: Turnaround More Distant After 3% Drop, Steepest Quarterly Decline Since 2008, housing has declined in value for 57 straight months, almost 5 years.

Since the housing bubble topped in most areas in 2006, and it's now 2011, that makes sense: 2006 + 5 = 2011.

American homeowners have lost $6.5 trillion in equity in those 57 months. Here is the data from the Fed Flow of Funds household balance sheet:

Homeowner's equity:
2006: $12.8 trillion
2011: $6.3 trillion

Net decline: $6.5 trillion

That is a big number, and the analysis I presented in The Housing Bubble Broke the Middle Class (April 27, 2011) suggested that this $6.5 trillion was roughly half of the middle class's total net assets.

It's difficult to grasp such large numbers, so let's look at some actual houses. The sales price of houses is public record, and more or less at random, here is a selection of recent home sales here in Northern California. I purposefully selected sales from a spectrum of neighborhoods ranging from working-class to very desirable, exclusive suburbs (the price will telegraph the property's desirability).

The key point here is that these catastrophic losses are taken by someone: either the homeowner, the lender, or the taxpayer. The gains were paper, but the losses are real. That is the ongoing tragedy of the housing bubble.

1. Recent sale: $820,000
Last sold 2007: $1.172 million
Nominal loss: $355,000
(does not include transaction costs or losses due to inflation)

Even if owner put down 30%, their equity was wiped out.

2. Recent sale: $110,000
Last sold 2005: $370,000
Nominal loss: $260,000

3. Recent sale: $160,000
Last sold 2004: $455,000
Nominal loss: $295,000

4 Recent sale: $175,000
Last sold 1999: $205,000
Nominal loss: $30,000

Nationally, prices have round-tripped to 2003, but that masks the reality that in many locales, prices have returned to 1998 or even lower.

This is a home in a very desirable suburb:

5. Recent sale: $650,000
Last sold 2005: $1.25 million
Nominal loss: $600,000

If you add up the losses from just these four homes purchased in the bubble era, the loss exceeds $1.5 million. That is a staggering loss from only four homes. Now multiple that by hundreds of thousands of homes.

Here are two homes in less desirable ("rough") neighborhoods:

6. Recent sale: $85,000
Last sold 2004: $295,000
Nominal loss: $210,000

7. Recent sale: $135,000
Last sold 2005: $419,000
Nominal loss: $284,000

Sadly, the subprime mortgage fraud enabled the "dream" of effortless profits from owning and churning real estate to filter down to even marginal areas. The bubble put real estate out of reach of qualified moderate-income buyers, and yet it was touted as a wonderful "innovation." It was certainly wonderful for Wall Street and those who originated the embezzlement-special mortgages, but less so for the taxpayers who were handed the bill to save the "too big to fail" banks and investment banks.

8. Recent sale: $255,000
Last sold 1996: $189,500
Nominal gain: $65,500

This is interesting because it offers an example of the pernicious effects of even "low" inflation. As we are constantly reminded, the U.S. has been in a "low inflation" environment for decades. This is of course a key part of the propaganda campaign to mask the severe erosion in wages' purchasing power.

On the face of it, the home seller pocketed a hefty profit of $65,500. But let's factor in commission and inflation.
The transaction costs (commission, closing, transfer fees, etc.) are typically around 7%, so the actual net capital gains would be around $47,500, not $65,500.

According to the BLS inflation calculator, which likely underestimates "real" inflation, it now takes $270,000 to buy what $190,000 bought in 1996.

So the owner actually lost purchasing power in owning this house for 15 years. Minus commission and closing costs, the proceeds were around $237,000, which is about $33,000 less than the inflation-adjusted break-even point of $270,000.

Yes, there is the mortgage deduction and tax breaks to factor in, but considered strictly as an investment, the nominal and real gains in real estate still matter.

Put another way: a house purchased in 1996 for $100,000 has to be worth $142,000 today just to keep up with inflation. Factoring in transactions costs, then the house would have to be sold for roughly $152,000 for the owner to extract $142,000--the sum needed to simply maintain purchasing power.

In other words, a house that rose 50% over the past 15 years has simply kept pace with inflation. The nominal "gain" is utterly illusory.

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Life of Illusion's picture


Expect 5 more years of the same,,,debt deflation in slow motion as Ben prints and squatters scream for more free living.

Gov. housing program at expense of taxpayer and politically incorrect bond holders.

Mr Lennon Hendrix's picture

There are two housing markets.  One is the places where people can live and viably.  The other is where people will never want to live again.  The first is in upscale neighborhoods of cities and towns powered by hydroelectricity, the second is the places that are not sustainable.

The suburban experiment is over.  People will not be able to afford driving hours everyday.  People will not be able to afford to live in cities that power off of gas.  Cities that have no natural resources are soon to be, if they are not already, ghost towns.  Say good bye to Las Vegas, Phoenix, areas of Detroit, and swaths of suburbs in California.  These markets will bottom at zero.
Towns in the NE and NW that are powered off of hydro will bottom next year.  People will rush to live where energy from water is cheap.  They will power their electric cars with this "free" energy. 

These are the two housing markets, and the rift will seperate the lower class from the upper once and for all.

falak pema's picture

the trick is to have a house in each market and a separate wife to service it. That way you win both ways, as Oligarch and as plebe. Double helpings at reduced prices! The USA has never been so promising!

cossack55's picture

Thats some serious hedging. I like it.

Careless Whisper's picture

The analysis in this post is slightly flawed because the 2006 equity of $12 Trillion was never really "there". Alot of people acted as if it was there but it was all just a fantasy.

ghostfaceinvestah's picture

Exactly, in a lot of ways it was a paper loss.

csmith's picture

Not a paper loss at all. IF the banks had not been bailed out (which in turn bailed out depositors), then depositors would've seen real cash losses. Instead, we enact bailouts and suck the value out of the currency a little bit at a time over 20 years.

srelf's picture

Wealth did operate during the bubble as if real, but it was indeed unreal, regardless of what the National Association of Realtors was telling everyone.

Calculated_Risk's picture

Phoenix has nuke, hoover, and solar.

Mr Lennon Hendrix's picture

I am with you on two out of three, but nuclear has a negative EROEI when considering storage costs.  Long Phoenix?

malek's picture

"Powered by hydroelectricity?"

Which cities do fit the bill? Only Las Vegas comes to my mind...

Mr Lennon Hendrix's picture

Excuse this post (considering hydro), I used bad examples, as LV and Phoenix run off of hydro.  The Bonneville damn and Niagra should keep the NW and NE going, but not much of the country runs off of hydro...well, not enough to power all the suburbs and whatnot.  I think the south has very little hydro power.  I guess I should take "The Long Emergency" back off of the shelf....

trav7777's picture

The FRB is effectively "making the payment" on these to prevent the MBS and CDOs from collapsing.

The free availability of debt masked the fact that wages cannot keep up with prices the way that they have...this is a symptom of the hollowing out of the production base in the USA.

At some point, this trade deficit and all the rest of it must normalize.  People claiming that the Bernank is the cause are fools; the cause is the massive export of dollars for 40 years against massive imports of everything else.  Any other country without a petrodollar trying to do this would have seen immediate forex normalization.  In fact, during the 70s, the dollar was experiencing exactly that, inflation to its true comparative value.  The petrodollar recycling scheme merely delayed that.

Roy Bush's picture

And the most insidious part is that you have to pay taxes on the "gain" that didn't even keep up with inflation.

the not so mighty maximiza's picture

but the NRA states " Now is the perfect time to own a home"

tonyw's picture

"It is difficult to get a man to understand something when his salary depends on his not understanding it." Upton Sinclair

SheepDog-One's picture

The other NRA states 'Now is the perfect time to own a gun'

friendly manitoba's picture

tyler  -  how old are you  and is that your picture  ? 

also  i  think you work  too  hard  but i do appreciate your work - how many people does it take to keep this thing  rolling  -   thx 

narapoiddyslexia's picture

Sorry if I'm wrong to ask, but is this a joke? The pix is from Fight Club, the movie, starring Tyler Durden. Look it up.

idea_hamster's picture

* starring Brad Pitt in the role of TD

bob_dabolina's picture

Wait a minute. 

Brad Pitt is running ZH?

Temporis's picture

When the hell do we start beating the crap out of each other?

I have anger issues and need to take it out on the random silver bashing trolls who frequent these boards any time there is a down tick.

Dixie Rect's picture

The first rule of Zero Hedge is you don't talk about Zero Hedge.

writingsonthewall's picture

So when does project mayhem start?

fuu's picture

You missed that wagon a year or so ago.

TheTmfreak's picture

Is that similar to actions being taken on silver?

Abitdodgie's picture

I bet you say that to all the guys

Sudden Debt's picture

5 hamsters to take care of the needed electricity (once a month they get a 1 hour brake and than the servers go offline)

1 FED guy to fuck things up so there's a constant feed of newstopics

1 US PRESIDENT to CHANGE to constitution, bill of rights and your ways of living

and Tyler who goes all PAPARAZI on them :)



depression's picture

Don't forget the 100's of brilliant commenters that snip and parse every word said along the way.

Sudden Debt's picture

Who would have guessed prices of CARD BOARD BOXES with drywall finishings to drop to a level of ONLY +500% of it's intrensic value?!


The average RAW MATERIAL VALUE of a house is still worth 6200$ so whatever happens, prices shouldn't drop below that level.


narapoiddyslexia's picture

And, as some folks always note, silver only costs $5/oz to mine. Thus, a house is worth at least 1240 ounces of silver! The American Dream.

TheTmfreak's picture

Which one do you think is more difficult and riskier of an action to do?

How about which one requires more specialized labor that you can't learn "tinkering in the garage"?

People are constantly proving that "any bum" can do it when it comes to building a house (and for alot cheaper).

narapoiddyslexia's picture

I pick mining. As a geologist who's built a house, I choose to never enter underground mines, but I live in my house. I stash my silver in bank deposit boxes, though, because I seriously doubt the government will seize it. Too many rich people, i.e., the owners of the government, own prescious metals. But to your point, I was being sarcastic. Just not very well.

TheTmfreak's picture

Geology eh? I minored (har har har) in it, and my girlfriend is getting her masters in it at the moment. Even though I make quite a bit of money eventually I'm "going galt" to start an organic self-sustaining farm, while I lush off of her career.

Oil wealth bitchez!

narapoiddyslexia's picture

I also got an MS in geology, long ago, and when I graduated from school, oil was $11 a barrel and 65% of the geotechnical workforce was unemployed. That was long ago, indeed. Guys who built houses got rich while I spent two years looking for work.

Back then, houses were a good deal. Not so much anymore.

TheTmfreak's picture

Times certainly have changed. While at Virginia Tech it was common knowledge that Geophysics MS students would be employed with starting salary of around 120k for their first year.

My girlfriend is doing an internship this summer with Cheveron making 6k a month. For an internship...

depression's picture

I wonder what all those house price numbers look like when priced in real money ?

sharkbait's picture

Inflation forces everyone to become a speculator.  Either you speculate in ways to keep pace with inflation or you speculate in how long it will be before your financial assets ( savings ) are wiped out.

It is wrong to inherently punish the risk averse savers.  Their willingness to accept lower returns should not be compounded by debasing the unit of measure of their holdings.

Alex Kintner's picture

Savers and people on fixed incomes are very Patriotic at the moment. Their wealth (or survival fund as the case may be) is being transferred to Bernanke with each push of his Q-Easy button. I salute their patriotism and hope they land a prized location in their local Hooverville once the dollar sinks to zero. (snark for those who didn't figure it out)

As for your ZH Id, I do not appreciate the sentiment. Good day to you sir!

fbrothers's picture

taxee taking a hit too.

serotonindumptruck's picture

True that. Many counties and municipalities refuse to adjust assessed values to reflect home price depreciation.

sun tzu's picture

My county tax assessor increased the value of my home. They needed more taxes