Lost: $720 Billion. If Found, Please Return to Owner, Preferably in Cash

According to the S&P/Case-Shiller index of housing prices, home prices have fallen by about 6 percent in the United States on average over the last twelve months. By my rough calculations, that means that home owners have lost about $720 billion in wealth as a consequence. That is about $2,400 for every person in America, and $18,000 for the average homeowner.

Relative to stock market declines, however, that loss of $720 billion over the course of the year doesn’t look quite so big. The total market capitalization of U.S. stock markets is the same order of magnitude as the total value of the housing market (between $10 and $20 trillion). In one week during October of 1987, the U.S. stock market lost over 30 percent of its value.

The $720 billion figure is also about the same magnitude as the amount of money the U.S. government has spent on the war in Iraq.

If you are a homeowner, how bad do you feel about this? You should feel pretty bad, but I’m guessing you would feel a lot worse in the following scenario: home prices did not fall at all last year, but one day you took $18,000 out of the bank to pay cash for a new car, and someone then stole your wallet with the $18,000 in it. At the end of the day, your wealth would be the same (down $18,000, either from depreciation of the value of your home or because the money was stolen), but one loss is psychologically far worse than the other.

There are many possible reasons for why it doesn’t hurt so much to lose money on an asset like a house. First, it isn’t very tangible, since no one really knows what their house is worth anyway. Second, it hurts less whenever everyone else is also losing on their houses. I once heard a very rich person say that he didn’t care about his absolute wealth, only what his ranking was on the Forbes list of richest people. Third, you can’t really blame yourself for house prices falling, but you could second guess your decision to carry around $18,000 in cash. Fourth, the fact that a thief has your money might make it worse than the money just evaporating into space, like it does when house prices fall. There are probably other reasons as well.

More generally, the economist Richard Thaler coined the phrase “mental accounts” to describe the way in which people seem to treat different assets as non-fungible, even though in principle it seems like they should be. Although my economist friends make fun of me for it, I definitely use mental accounts myself. For me, a dollar made playing poker means much more than a dollar earned from the stock market going up. (And a dollar lost playing poker is likewise far more painful.)

Even people who deny that they are affected by mental accounts often fall prey to them. I’ve got a buddy in that category who won a big bet on NFL football (big relative to his usual football bet, but very, very small relative to his overall wealth) and the next day he spent the proceeds on a fancy new driver.

What does this all mean for housing prices? Well, if prices start going back up, it would be a lot more fun if the price increases came in the form of little packets of cash dropped outside your front door with the morning newspaper, rather than via house appreciation. A fact that, I suppose, all those people who took out home equity loans figured out a long time ago.

Richard Stretton

Losing 18k off the value of your house when the whole market is going down isn't as bad as losing 18K cash because, in the case of wanting to move homes all the future homes you might buy have also dropped in value reducing the affect of your loss, where as if you lost 18k cash and then wanted to move houses and they haven't dropped in value you are worse off. If you are highly leveraged effect is less as you would have lost leveraged money reducing the amount you could spend on the house by more than the drop in the housing market


Fifth reason why the house depreciation doesn't feel as bad as having the cash stolen from your wallet:

People expect (or hope) that their house values will eventually go back up to what they once were. Also, it doesn't feel as bad because of the recent housing boom... since the house just appreciated significantly a couple of years ago, it doesn't hurt as bad when it depreciates back to a value that's still higher than what it was worth 6 years ago.


People should definitely develop a personal scale of "mental accounts." For example, at the peak market in 2007, my retirement accounts were up for the year by "a real good entry level Ferrari, even with the carbon ceramic brakes and paddle shift upgrades." At the bottom, a couple of months or so later, we were down to mere "Corvette" and now we are back to "real nice Porsche 911" but not up to the "Ford GT." Apart from being fun, it helps keep things "real" (at least for the scale designer; my wife tends to get stuck at "enough for a real nice pair of shoes"). Yet, on the other hand, when things fluctuate so widely, maybe one learns to become less likely to run out and buy the Ferrari (or a real nice pair of shoes) at some "local peak."


I think the homeowners in Levitt's scenario are being completely rational and that there's no need to bring mental accounts or other psychological analysis to this problem. Homeowners care more about $18K being stolen because that's money which can no longer be used to increase their utility. On the other hand, the appraised value of a home has nothing to do with one's overall utility. What matters is i) the benefit a person receives from actually living in a home and, ii) at the time of resale, the actual amount of money received from a sale. As to #i, people will enjoy their homes the same regardless of the home's appraised value.

And with regard to #ii, most people are not looking to sell their home in the near future. So the drop in home values is, at most, a future event that should rationally be discounted. But that's at most, because even though appraised values are down today, they could very well be up tomorrow. Because homes are very long-term investments, rational homeowners would not overly fret about short-term or even medium-term fluctuations in price. In addition, homes are very different from cash or stocks because if people sell their homes, they almost certainly will need to buy another one (we all need to live somewhere). So a rational homeowner would see the loss in value in his present home as a wash--because his next home, which he hasn't yet bought, will also be cheaper.


Henry Barth

A friend, aged almost 65, refinanced his house -- in a college town next to Boston -- for $760,000. It is worth no more than $500,000, by any estimate. He took out over $400,000 cash when the dust had settled.

He has no income. None. No savings, nothing. No Doc loan from a huge company (think WF).

What will he do? Simple. He's planning on abandoning the property when the sheriff shows up at the door.

He's $400,000 to the good, apart from any tax liabilities. Massachusetts is a non-recourse state. He'll be moving to Brazil soon after the sheriff arrives.

I wonder if any other people did same.


The reason the drop in housing prices doesn't bother me is that the value of my house doesn't affect its utility to me. It still keeps me warm and dry and holds all my stuff. Sure, it's an asset I could sell if I needed money, but I didn't buy it for that reason.

Now if I was planning on selling my house soon, then I'm sure I would feel a lot more like someone had stolen the money out of my car.


In addition to the smart comments made by the commentators here, I'd add that a lower-home value can translate into more cash on hand in the short term (in the form of lower property taxes).

a student of Economics

There no real mystery here.

I own a house -- an asset.

I also need to live in a house, which is costly -- a liability.

As long as I own the same amount of housing stock as I expect to need, then I am 100% hedged.

It makes no difference if prices go up or down (overall), as long as my house value is at the same place relative to overall housing values.

If I were a renter, I would be happy to see housing prices fall (since I'm "short" housing).

If I owned two (or more) houses, I would be unhappy, since I would be "long" housing.

If most home owners have roughly the same amount of housing that they expect to consume, then it makes no difference if prices move.

The wallet loss is a different story.


Seems like if all housing prices are going down $18,000, then if I sell my house, I'm out $18,000. But theoretically, if I sell my house to buy a different house, I recouped that loss by purchasing the next one for $18,000 less. So it's a wash. It only really matters if you decide to "cash out" on your house.

The reality is that people are spending the same amount on houses as they did 2 years ago, they just can't afford as much as before due to higher interest rates....so they're making the same payments, just on less money, which means they can't afford what they used to afford.


While mental accounting may have a role here, I don't think it is the main issue.

As someone who owns exactly one home, why should I care about house prices?

I have an asset called a house. But I also have a liability - I need somewhere to live for the rest of my life. These two things are roughly the same, so I am immunized against any housing price movements. In other words, once I own a home, changing housing prices do not affect my lifetime consumption.

In fact, I should even be happy when housing prices fall because I have kids. Those children will also have to buy houses someday (to offset their housing need liability) so I am essentially short the housing market.

(Falling housing prices could affect people who are cash constrained, but that's another story.)


I tend to think of my house as just another one of my long term investments. When my self-directed IRA loses money in a quarter, I don't panic. I don't even really think of it as lost value. Over the long term, I know it will work out to my benefit. Maybe I'm being too optimistic in assuming the housing market will improve. I can see how people who purchase homes as a temporary investment could be panicking. For me, I'm in it for the long-haul, so I'll just wait it out...

william reichert

If the value of your house drops $ 18,ooo and you sell it, you are out$ 18,000. But at the same time the buyer has bought a house worth ( in your terms)
18,000 more than he paid for it. So there is no
net loss for the economy as a whole.It's just like if you have a 20 dollar bill and I give you a ten dollar bill for it, you are out 10 dollars but I am ahead ten dollars. The total amount of money in the system is unchanged. The housing crisis is obviously only a problem for present owners. It is obviously a boon for prospective buyers.
This is not the same as the loss incurred in the Iraq war since that loss represents real goods that are blown up or used up and labor ( soldiers) that could have been used productively in other endeavors.( like building homes for example)


So what?
Could you entertain us with more interesting writing, please?


I get your point, but can't you just say that people understand housing prices have a risk associated with it and prices go up and down. People might be more comfortable with them going down because either a) they knew it could have just as likely gone up or b) (more likely scenario) they believe it will go up tomorrow. Now this is all relative to getting the money stolen, which, I would strongly guess would have MUCH less chance of being recovered


Fifth: you still own the asset and the chance of it recovering the value at some point is a reasonable one.

Rich Wilson

How do I feel?

I'm a renter. I had a bad few years employment wise from 2002 to 2005- durring which we watched the 'American Dream' skyrocket out of our hands.

I'm back on my feet, and we've been dilligently saving for the last three years. The 'Amerian Dream' is now easily within our reach.

I feel bad for all those lost or are losing their homes- but for all those who lost when making a 'sure buck'? Hey, this is America. We are Capitalist. Your lose is my gain. Hooyaa!


One other factor - if a someone steals $18,000 from your wallet, the chances of getting that money back are slim and none. However, losing $18,000 in value on a home is likely a temporary loss (in the long term), because home value are likely to rise and restore that "lost" $18,000. In other words, it may be easier to deal with that loss of home value, because you know there's a decent chance of eventually getting it back.

(Obviously, for someone in the midst of a short-term real-estate transaction, this wouldn't be much confort.)


Isn't this just called realization? Losing 18k in cash through theft is a realized loss. Losing 18k in home value without selling is an unrealized loss.


The flaw in your analogy is the assumption is that we all value assets according to their dollar value. But I tend to value an asset like my house in terms of its usefulness to me and the pleasure it brings me and my wife.

My house is not worth any less to me than it was when I bought it early in 2007. I still have the use of all the rooms, all the appliances and systems still function to keep me comfortable, it is still close to my family and to places I enjoy visiting, and the view is just as spectacular. So it isn't worth any less to me, no matter what the "market" may say. I'm not about to trade it in for cash and blow all the proceeds on other types of consumption so its market price is irrelevant to me.

Jonathan Katz

Actually, a more likely explanation for why people (should) care less about the value of their house is that everyone has to live somewhere; even more to the point, most people would consider themselves to be fairly geographically constrained as to where they can live. (This is assuming one does not want to leave his/her job.) So if the value of my house goes up (along with the rest of the market), it's not like I can really sell it for a profit -- I will have to buy another house which will now cost me more.

Given this, I never understood the obsession with housing prices among those who already own a house...