How is it that declining home prices are bad for the average US citizen? I understand there wealth decreases but real estate is usually a long term investment so price can always rebound.
1) You're assuming that prices WILL rebound. 2) Declining values produce pessimism. 3) Declining values bring lending and spending to a halt.
Because the average U.S. debt junky was using home equity to buy everything from SUVs to clothing at Nordstrom to college education.
Simple enough to understand. The average homeowner used their house as an ATM. Some of that due to greed and the need for immediate gratification. Most of it due to the fact that Joe Lunch Bucket has been working for slave wages since the 80's. Now add that if Joe has bought a house in the last 5 years, he's upside down and the rest have lost value. All are unlikely to see decent returns on that investment for a decade or two. Kick in massive unemployment and you have a recipe for disaster. Bottom line, if Joe doesn't have a job, it doesn't matter what the price or interest rate is...he ain't a buyer. Along comes Uncle Sugar to artifically prop up the market, but how long can that last? Taxes going up for those that still have a job and businesses which still employ are hesitant to hire because of those upcoming taxes. Average Joe takes it up the ass again. Now for the money boys, price coming down is just another windfall in the ever popular game of priviteizing gains while socializing losses. Nice scam, eh?
Now to give you a serious answer instead of those cheap shots that everybody else is giving. Real estate can and cannot be a long term investment. These cycles can literally last decades. For example, go back in history and look at around the early 1800's. The prices back then were absurd, and even though you scratch your head. Thus real estate can go up and down. However, if the real estate is in the right location then yes it very much is a long term investment. For example, imagine owning 10 acres in downtown New York. You would be very very very rich if you bought about a 100 years ago. On the other hand with Detroit not so lucky. These down cycles are rough because as one other poster said is that it depresses things because somebody has to swallow the cost of paying too much. It becomes a sort of musical chairs. Of course if you buy low you will be all right. I myself am a fan of property and not real estate. Property has lower costs and the waiting and holding period costs peanuts. Whereas real estate not so lucky.
The 2nd or 3rd generation of trust fund babies would have sold the land and squandered their inheritance. The market has a way of redistributing wealth.
Peter Minuit acquired Manhattan in 1626 from native people in exchange for trade goods worth sixty guilders, often mistakenly said to be worth twenty-four dollars. It can be converted to modern currency by comparing bread prices etc. and amounts around $1000 nowadays. If he put that 60 guilders away and earned 7% compounded interest on it until today...it would still buy manhattan island today and on top of that,pay off the national deficit (total return would be 179 trillion dollars). If he earned 8% compounded interest, it would pretty much be enough to buy the entire world.(6.3 quadrillion dollars) Or just give every man woman and child almost a million dollars each. Basically...given enough time, we would all be rich.
Negative household wealth/balance sheet effects and the adverse feedback loop resulting from the 'financial accelerator'...
1) That's what lazy people and academics would prefer to believe. 2) Why aren't the Rockefellers worth trillions and quadrillions of dollars today? Because society and government doesn't tolerate enormous concentrations of wealth in a few hands. 3) Again, after the "first generation" of wealth builders in a family dies off, the next generation(s) will eventually squander the fortune.