Did Underwater Homes Kill the US Economy?

San Francisco HomesDid the large number of homes where values dropped below the cost of their mortgages kill the economy during the Great Recession? Wonkblog thinks so.

It is widely recognized that the fall in housing prices had a “wealth effect” that led homeowners across the country to cut back on spending. In the updated paper, Mian, Sufi and Rao measured how much more underwater borrowers probably cut back on spending compared to borrowers without an overhang of mortgage debt. (More precisely, they measured how much homeowners cut back on auto spending for each dollar loss of housing wealth. But that’s important; the decline in auto sales was a significant part of the economic contraction.)

The authors found that being underwater makes a big difference. As the chart below shows, Zip codes with fewer than 15 percent of homeowners only cut back only a little spending only half a cent less for every dollar their home fell in value. But in Zip codes where more than 50 percent of homeowners were underwater, borrowers cut back five times as much spending 2.5 cents less on car purchases for each dollar of reduced housing wealth.

So does that mean that the homes now “surfacing” will prop up the economy?

Click here for gay realtors, mortgage lenders, and other real estate professionals.