The current economic recession has taken its toll on homeowners in the United States. Property values for the 1st quarter of 2009 in the US were down an average of 14% over the previous year. This is after a decline of almost 10% last year in median home prices. States such as California, Florida and Nevada have been hit even harder by rising foreclosures and the limited availability of credit. Housing prices have dropped over 25% in these states and continue to plummet with no end in sight. Economists estimate that US home prices will decline another 10 to 15% before bottoming out.
The global financial crisis has hit the UK as well. According to research by PricewaterhouseCoopers (PWC), the credit crisis has wiped £1.9 trillion off the average level of UK wealth since 2007. Whilst the amounts vary considerably, PWC believes that this equates to a reduction of £40,000 for every UK adult over 18. This figure doesn’t even take into account the millions of retired people, not to mention those residing abroad, who no longer receive the income they once did due to falling interest rates. Economists estimate that over 50 trillion dollars of wealth was lost in 2008 alone. That number is staggering! The loss in asset prices was led by the decline in property values.
This is especially troubling because the average person’s wealth is tied up in one major asset, their home. Millions of people rely upon the equity in their homes to maintain their standard of living. Home equity loans are used to finance college educations, automobile purchases, medical costs and etc. As housing prices have declined many people have found themselves unable to borrow money from their homes to purchase needed goods and services. As a matter of fact many individuals that have purchased a home over the past 5 years may be surprised to find themselves “upside down”. This is when you have negative equity in your home and you actually owe the bank more money then you can sell the house for.
As foreclosures are rising, banks are lending less and tightening credit standards which is making capital scarce. Therefore consumers have less disposable income and are shopping less thus resulting in massive layoffs at corporations. These unemployed workers are unable to make their mortgage payments leading to more foreclosures and the cycle continues. Even local governments are feeling the pain of declining home values. State governments are collecting less property tax revenue and are having to layoff employees and cut essential services.