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Poof!—Bursting Housing Bubble Evaporates Main Source of Middle-Class Wealth

One of the few bright spots for the typical Pennsylvania family since 2001 was the rapid appreciation of inflation-adjusted housing prices. These increased by 39% between the first quarter of 2001 and the same quarter in 2007. For many Pennsylvania families, this rapid run-up in housing prices added significantly to their net worth. This new wealth also contributed to an explosion in home equity loans as workers, their paychecks failing to keep pace with the cost of living, borrowed against the rising value of their homes. The collapse of the housing bubble has brought to a screeching halt the rapid appreciation of Pennsylvania housing prices and the ability of homeowners to borrow against the value of their homes to make ends meet.

Since the 1st quarter of 2007, inflation-adjusted housing prices in Pennsylvania have fallen by 4%. Over the same period, housing prices nationally have fallen 7%.

In July 2008, Dean Baker of the Center for Economic and Policy Research (CEPR) projected that, in the United States as a whole, a 10% decline in real housing prices by 2009 will reduce the wealth of the typical U.S. family in the 45 to 54 age cohort by 35%, leaving this cohort with just $800 more in wealth than similar families had in 1989. (No data are available on wealth trends for Pennsylvania since the housing bubble burst, but there is no reason to believe the overall trends are different than the national ones.)

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