Current economic recession in the United States and all around the world
is seen as the worst downturn since the great depression.
There is little doubt that this global recession was caused by the
financial meltdown in the United States and quick spread out to touch
almost every corner of the world. It appears to be a commonly
accepted theory among economists that this episode of US recession was a direct result of
sudden busting of house bubble, and the house bubble was created by
rapid growing yet unregulated subprime mortgages.
These are all true. But the real questions are, as shown in Fig 1, the
house bubble, if any, started to emerge in the closing years of 20th
century, why has it not been busted until year 2007? and during
that over a decade long period, were there any indications that had
signaled this crisis might happen eventually? With these unanswered
questions, we must think deeper and much deeper so to make sure this
type of sad economic drama will not recur.
It is the
reduced affordability of average consumers that has busted the bubble in
I am not an economist, but it does not take a economist to
understand one simple plain word, affordability. It is a common sense
that the economy of a nation is supported by domestic spending of
average consumers. It is equally clear that growth of the house market
can not be sustained without synchronized growth in household incomes.
When the growth in household incomes under pace that of the house
market, the affordability becomes an issue. With the gap between two
growth rates trending wider, affordability problem is inevitably
escalated and will result in a collapse of the house market eventually.
That was exactly how the house market in the US was collapsed.
Let's divide the recent history into two periods, Clinton era and Bush
era. A division timeline lies right in year 2001 when Bush took the
office. Apparently as shown in Figure 1, chart of S&P home price
indices, shift of power did not cause the growing pattern of the house
market to change. Moreover, the indices even kept its climbing pace during
2001-2002 recession. I recall many economists and economic commentators
even used this fact to argue validity of the recession. Unfortunately,
Figure 2, chart of real median household income for the same period
paints a completely different picture.
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S&P Home Prices Indices 1991-2007