Guest blogger: Stan Sorscher, Seattle, WA

Part 1 | Part 2 | Part 3

Households adjust

Households have made a series of accommodations to stretch limited resources to maintain our standard of living. At least three major adjustments can be counted: additional wage earners, reduced savings, and tapping into housing equity.

Second wage earner

In the 70’s women entered to workforce in large numbers, for many good social and personal reasons. One of those reasons was to maintain standard of living while real wages stagnated. Even with the second wage earner, household income failed to match increases in productivity.

Reduced savings

Households made another adjustment to stretch resources. They reduced savings, using those resources for consumption.

Some societies save more than others. Estimates of personal savings in China are well above 20 or 30% of personal income. Germany has historically high savings rates. In the post-World War II period, US personal saving was around 7% of GDP or about 10% of disposable income. Savings were typically held in retirement accounts, home equity or personal investments. Figure 3 shows a fairly abrupt change in behavior in the early 80’s. The most recent quarterly data show a dramatic rebound in savings – reaching about 3% of GDP.

Extraction from Home Equity

Households made a third adjustment to stretch resources – withdrawals from home equity. A popular term for this is “using your home as a cash machine.” As housing prices rose, homeowners could refinance, buy and sell, or take out second mortgages. The result was to extract equity from their homes to sustain living standards. Costs for health care and education rose faster than inflation generally. Workers were more likely to suffer periods of unemployment as the economy de-industrialized and workers were downsized, laid off, or made contingent or put on part-time schedules. Home equity withdrawals could help cover these rising costs. This is another way of saying the social safety net was weakened since the mid-70’s.

Alan Greenspan and James Kennedy developed a measure of how much money households extracted from their home equity. Their measure is tracked quarterly in Figure 4. Home equity extraction was relatively small in the 90’s, but grew to nearly a trillion dollars at the height of the housing bubble in 2005 and 2006. As the housing market cooled off, equity stopped growing, and even before the banking crisis, equity extraction started to decline.

The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views and opinions of the Economic Opportunity Institute.