The U.S. Economy is Still Stifled by Housing Collapse

house under water

Six years ago the U.S. faced a sub-prime housing crisis. Bush and Obama both worked a great deal to help overcome the issues. The problem now is that those that took on so much debt at that point are currently facing major problems when it comes to getting out from under water. This is seen primarily in places where housing prices have fallen. In states like Texas, where the house prices have stayed steady, or flat, the issue has been less noticeable.

Debts have doubled from 2000-2007 to $13 trillion, according to Equifax and the Federal Reserve Bank of New York. A large portion of that debt has been taken on by middle-class or working-class Americans who have seen flat or failing incomes.

Much of the debt came from mortgages and home equity loans. Once the house prices fall, borrowers can quickly lose the equity they’ve built up. Still, they owe the bank what they originally borrowed.

This heavy household borrowing is not a new phenomenon though, according to Atif Mian and Amir Sufi, authors of House of Debt, the same problems happened in the U.S. in the 1920s and Japan in the 1980s, generally after steep downturns.

Larry Summers, Former Treasury Secretary, led President Obama’s National Economic Council from 2009 – 2010. He argues that the suggestion in House of Debt that President Obama should have worked harder to help homeowners that were struggling to pare down their debt, even if that meant forcing banks to forgive parts of loans would never pass Congress.

"There was essentially no chance of it getting the requisite 60 votes in the Senate, where we were not even able to muster a simple majority," Summers wrote in the Financial Times. "Should a more Herculean effort have been made? Perhaps. But the president and his team felt that in a world where many legislative battles lay ahead, a failure ... would be costly in time and political capital."

It would appear we are far from safe when it comes to our rebound from the turbulent last decade or so. It seems the best advice is to continue to save and be careful with your spending. This isn’t to suggest that you should stop spending all together. Ensure you are budgeting wisely and carefully step back out into the spending world.