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Fed report details consumer behavior during recession

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The rise and fall of home prices was a key driver in household savings and debt behavior during the Great Recession from late 2007 to June 2009, according to a new Federal Reserve Bank of New York report.

Consumers responded to the economic stresses of the recession by curbing spending, reducing contributions to retirement accounts and paying off debt.

The savings rate during the recession largely reflects a decline in debt as households paid down mortgages and is not reflective of increased contributions to retirement or savings accounts, the report said.

Consumers were pessimistic about the availability and tightening of credit during the study period, according to the January report written by Rajashri Chakrabarti, Donghoon Lee, Wilbert van der Klaauw and Basit Zafar of the New York Fed.

The authors used a variety of data for the report, including a special Federal Reserve survey on saving, administered between the end of October 2009 and January 2010 as part of the Fed’s Household Inflation Expectations Project.

One of the most dramatic consequences in the rise and fall of home prices was the dramatic fall in home equity, the report said.

“When home prices began to fall in 2007, owners’ equity in household real estate began to fall rapidly from almost .5 trillion in (the first quarter) 2006 to a little under .3 trillion in 1Q 2009, a decline in total home equity of over 60%,” according to the report. "At the end of 2009, owner’s equity was estimated at .3 trillion, still more than 50% below its 2006 peak.”

Among homeowners with mortgages, at the end of 2009, 21% reported they were “underwater” — meaning they owed more than what their house was worth — at the time of the survey. That share of underwater owners is much higher among investors, defined as those with three or more first mortgages.

Ultimately, the impact of the decline in the housing market on a specific household’s financial situation and the consequential behavior depends on many factors, the authors wrote, including where the house is located, when the house was bought and how it was financed, among other influences.

On the positive side, consumers saw historically low interest rates on loans. But few had a demand for them and supply tightened due to tougher underwriting standards.

The authors reported that the proportion of all mortgage originations with loan-to-price ratios of more than 90% dropped steadily from 31% in the middle of 2007 to about 7% of new mortgages at the end of 2009.

In addition to significant losses in housing wealth during the recession, the report also detailed how households were affected by the stock market crash in October 2008 and the declining labor market. Like the housing market, which saw big house price declines in  bubble states like California, Nevada, Arizona and Florida, the unemployment rate also varied geographically and by age groups.

The national savings rate, computed by the Bureau of Economic Analysis, increased from historically low levels of around 1% in the first quarter of 2008 to recent levels of more than 6%, the report said.

Write to Kerry Curry.

Follow her on Twitter @CommunicatorKLC


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