Relax, Your Wealth Was Not Destroyed

Larry Summers, Director of the National Economic Council, is known for venturing into areas where angels fear to tread. But perhaps he fell off the cliff today! In his remarks describing causes of the recession he said:

On a global basis, $50 trillion dollars in global wealth has been erased over the last 18 months. This includes $7 trillion dollars in US stock market wealth which has vanished, and $6 trillion dollars in housing wealth that has been destroyed.

Now let's take a look at some of that destruction. How has housing wealth been destroyed? Presumably by the inevitable drop in housing prices that had climbed to unreasonable and unsustainable levels.

But consider the value of my home. I bought it about fifteen years ago for around $170,000. Some people (like the local tax assessor) say it was worth $400,000 a couple of years ago. If I had sold it for that amount, what could I do with the money? Why, I could buy a comparable home in the same neighborhood!

And some people say it is worth $300,000 today. And if I sell it for that amount, what could I do with the money? Why, I could buy a comparable home in the same neighborhood!

So where did I lose any wealth? I didn't.

Better example. I bought a cabin on a lake in 1979 for $25,000. I sold it three years ago for $225,000. Some people would say I made $200,000. Nope! I used the money to buy a comparable cabin on another lake with quieter neighbors. There was no gain in wealth whatsoever. Just a little more peace and quiet. In fact, I lost money. The federal and state governments truly believe that I gained wealth and made me pay a capital gains tax on the increase so I ended up having to shell out money to the government in order to make my even trade.

I'm sorry, Larry, but housing does not increase in value. Ever. The only people who believe that it does used to work on Wall Street and invented clever ways to sell securities based on the fictional increase to investors. You'll find them in the unemployment line now.