When savings are not counted as savings: The missed opportunity to use home equity to stimulate the U.S. economy

De Koning, Kees (2022): When savings are not counted as savings: The missed opportunity to use home equity to stimulate the U.S. economy.

Abstract

One can describe the accumulation of wealth in home equity as a benefit to the homeowners. However, in practice the release process of such equity into cash is hindered by the fact that a joint ownership of a home by a lending institution and a household turns the equity stake into a debt obligation. If a household attempts to withdraw some cash from their home equity stake, the banking system turns such equity into a new debt obligation. This is -economically speaking- a worst-case scenario for households. When households reduce their shareholdings in companies, in government debt titles or by withdrawing money from their own bank savings, the conversion into cash does not turn itself into a new debt obligation. The result of these latter economic actions “only” reduces their accumulated savings levels.

In the U.S., the level of home equity reached $25.3 trillion by the end of the third quarter 2021 according to the statistics from the Federal Reserve. With an estimated nominal GDP for the U.S. of $23.2 trillion for 2021, this single savings category of $25.3 trillion has now exceeded the total U.S. GDP level, a remarkable economic development! For the E.U., the European Central Bank has published a study in 2020 called “Household Wealth and Consumption in the Euro Area”. A rough estimate of net housing stock values in the E.U. showed a net worth in housing stock of Euro 45 trillion or in U.S. dollars $40.3 trillion in 2019. The World Bank estimated the EU GDP at U.S. $15.27 trillion for 2020. The European Central Bank, just like the Fed in the U.S., has helped governments to spend more than their tax receipts with the help of Quantitative Easing exercises.

What, in economic terms, seems essential is that Central Banks and their governments take steps to put home equity levels on an equal footing with other forms of accumulated savings. For most countries involved, the level of savings incorporated in home equity represents by far the largest savings category.

Why and how this can be done for the U.S. is explained in this paper.

• Item Type: MPRA Paper
• Language: English
• Keywords: Home equity in the U.S.;Long term trends in home equity;Federal Reserve interest rate policy for home equity; home foreclosures;Unemployment levels.
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

References

References:

1. U.S. Bureau of Economic Analysis, Gross Domestic Product [GDP], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDP, January 10, 2022

2. Board of Governors of the Federal Reserve System (US), Households; Owners’ Equity in Real Estate, Level (OEHRENWBSHNO), retrieved from FRED, Federal Reserve Bank of St.Louis; https://fred.stlouisfed.org/series/OEHRENWBSHNO

3.Unemployment rates in the U.S.; https://fred.stlouisfed.org/series/UNEMPLOY

4 https://www.federalreserve.gov/econres/notes/feds-notes/asset-ownership-and-the-uneven-recovery-from-the-great-recession-20180913.htm

5 Wikipedia., Timeline of the U.S. housing bubble; https://en.wikipedia.org/wike/Timeline of the United States housing bubble

6 U.S. government debt levels; https://fred.stlouisfed.org/series/GFDEBTN/

7. U.S. unemployment statistics; https://fred.stlouisfed.org/series/UNRATE/

8. Federal Reserve Monetary Policy;

https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm

9. Median house prices in the U.S.;

https://fred.stlouisfed.org/series/MSPUS;