The Subprime IS Your Problem

An article published in The New York Times builds an interesting case for the long term effects of the subprime on the US economy.

""Owning a home in this country has been a principal source of wealth creation for low- and moderate-income people," said Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University. "In the absence of home equity, families will inevitably spend less."

Homeowners accumulate wealth faster than renters. Median net wealth for owners was $184,400 in 2004, compared with $4,000 for renters, according to Federal Reserve figures."

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This information allows us to link declining homeownership with future economic slowdown.

The premise is that renters don’t accumulate wealth at the same rate as homeowners, which means they have less to spend over their lifetimes.

If the proportion of renters to homeowners increases, a greater percentage of the population is amassing wealth at a slower rate.

From this we can infer less spending and slower economic growth in the future, because there will be even more renters than homeowners in the future.

The reason there are more renters today than a year ago links back to the subprime.

A period of lax lending standards allowed for people with limited means to borrow money at below prime rates for a set time period. When the period ended, the interest rate reset at above prime, and the borrowers found themselves unable to pay.

This led to a rise in foreclosures, when banks repossess people’s homes and auction them off, forcing the inhabitants out. The individuals lose their home, and with it any wealth they had amassed throughout ownership.

These people will struggle to get a new mortgage with their updated credit history, and thus have little choice but to return to the rental market.

Thus, the subprime is forcing more and more people out of their homes, and out of the homeowner category. Not only do you lose your home, you also end up with lower chances of amassing the money to buy one again.

The phenomenon is not only increasing the renter proportion of the population, it is also decreasing the rate at which they can amass wealth.

So, as much as you might think subprime is not your problem, the operative word to add to that sentence is "yet." More renters means economic slowdown, and that’s a game where everybody loses.