3  See Atif Mian and Amir Sufi (2011), ‘‘House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis,’’ American Economic Review 101, 2132–56, and (2011), ‘‘What Explains High Unemployment? The Aggregate Demand Channel,’’ University of Chicago, unpublished paper. BIS central bankers’ speeches  3  reversal reduced the aggregate wealth of homeowners and, in the worst case, left many “underwater,” meaning that the amount of mortgage debt secured by their home exceeded its current value. This outcome is reflected in the dramatic decline in owners’ equity in household real estate, seen in Chart 3 (Result was a Huge Decline in Owners’ Equity in HH RE). It is interesting to note that while home prices rose during the boom, homeowner’s equity share remained constant. Thus, prior to the end of 2006, on average for each 1 percent increase in home prices, homeowners increased their mortgage debt by 1 percent (through higher balances on first mortgages, cash-out refinances, second mortgages, and home equity lines of credit). When house values began to fall, so did corporate equity values, which depressed household wealth further Chart 4 (Stock Market Wealth also Fell Sharply), limiting households’ options for reducing their debt burdens or sustaining their prior levels of consumption. Consequently, and in line with the logic of the research I discussed earlier, U.S. households decreased the cash flow available for consumption by paying down debt during the recession and early recovery.
Here we see that the share of new mortgage borrowing by applicants of all credit scores below the highest quartile declined, while that of the highest quartile increased from about 40 percent to 70 percent. This suggests that lenders were far more selective in their underwriting standards for mortgages than they had been in the period between 2000 and 2006. Many of these powerful forces of demand and supply that together led to the decline in household borrowing, and hence to the fall-off in resources available for consumption, have either diminished or slowly reversed as the economic recovery that began in 2009 has continued. First, equity values, which dropped 51% between October 2007 and March 2009, as measured by the S&P 500 index, have recovered significantly, rising by almost 140% percent through the end of 2013 Chart 8 (Stock Market Wealth also Fell Sharply, 2nd half). In addition, as seen in Chart 9 (House Prices Peaked and Fell Precipitously, 2nd half) house prices have finally begun to recover, and have been doing so on a broad geographical basis. House prices are up 21 percent since their nadir in 2011. This has helped restore owners’ equity in their homes Chart 10 (Result was a huge decline in Owners’ Equity in HH RE, 2nd half). In sum, as seen in Chart 11 (Household Net Worth), aggregate household wealth has recovered substantially as a percent of disposable income, albeit with a lesser contribution from housing and a greater contribution from corporate equities.