|Title: ||Study: Americans Will Be Permanently Impacted by Recent Recession |
Washington, DC (May 10, 2010) – The historically slow recovery of the economy and lack of substantial job growth could cause negative, lasting effects on
the current young generation and force many retirement age individuals to remain in the workforce, according to a study released
today by the Mortgage Bankers Association (MBA). The impact of a higher unemployment rate for Americans aged 16 – 24 could
have a lasting effect on lifetime earnings and attitudes toward risk and social policies. In addition, those nearing retirement
are delaying retirement and reentering the labor force in an effort to rebuild some of the retirement wealth that was wiped
out by the recession.
The study entitled, “Household Reaction to the Financial Crisis: Scared or Scarred?,” which was conducted by Professor Joe
Peek, Gatton Endowed Chair in International Banking and Financial Economics at the University of Kentucky and sponsored by
the Research Institute for Housing America (RIHA), analyzes how Americans will respond to the current crisis in terms of consumer
spending, saving rates, credit supply and implications for the strength of the economic recovery.
“While Americans, and the American economy, are noted for their resilience, the current financial crisis and recession exceeded
the devastation created by other post-World War II recessions,” said Peek. “Saving rates have risen substantially and many
Americans will continue to cut their spending sharply out of necessity, others out of fear of what the future holds. Since
consumer expenditures account for about two-thirds of GDP, we are facing the “paradox of thrift” as households try to rebuild
their net worth, with the reduced spending likely to delay and weaken the recovery from the ’Great Recession’.”
“On the housing front, it is unlikely that the dramatic rise in loan delinquencies, home foreclosures and bankruptcies will
show a meaningful decrease, as high unemployment and low house prices are widely projected to remain for an extended period,
as well as the rise in problem loans at banks that will restrain their willingness and ability to provide credit,” continued
Peek continued, “Unfortunately, we face the possibility of being caught in a vicious circle. The cutbacks in consumer and
business spending are likely to contribute to a more anemic recovery. In turn, we will likely see a deepened and prolonged
weakness in consumer and business spending, further undermining the recovery. The longer the malaise in economic activity
continues, the more likely that diminished spending persists, adversely affecting future economic growth and the standard
of living. Such headwinds to a strong economic recovery are likely to have lasting impacts on the values and behavior of
the current generation, much as the Great Depression had on its generation.”
Michael Fratantoni, MBA’s Vice President of Research and Economics added, “The severity and duration of the most recent downturn
far exceeds what we have experienced in past recessions and has resulted in the disruption of millions of lives. We can’t
know for certain at this point, but it is more than reasonable to prepare for a world that has been irrevocably changed by
this experience. For the many reasons discussed in this study, we should expect hesitant homebuyers, cautious businesses,
and conservative lenders in the years ahead.”
Key findings from the study include:
• For U.S. data, most estimates of the wealth effect (propensity to consume out of total household wealth) are in the range
of 3 to 8 cents of an additional dollar of wealth. This wealth effect is now operating in reverse, with losses in housing
and other wealth resulting in reduced consumer spending.
• The downtrend in the personal saving rate over the past twenty years has been reversed. The saving rate rebound is likely
related to the large capital losses on household assets, as well as a precautionary motive in response to increased uncertainty.
• Underemployment is much higher than the reported unemployment rate, and the persistence of spells of unemployment are lengthening.
Many are delaying retirement in an effort to rebuild retirement nest eggs. Firms are shifting from permanent employees with
benefits to part-time, temporary and independent contract employees.
• People entering the labor force during recessions have lower lifetime incomes. Those unable to find work today are going
to be competing with a new crop of graduates in a few months for a still limited set of job openings. Without a reasonably
rapid recovery in employment, at this point an unlikely scenario, we risk creating a “lost generation” that may never catch
• Credit supply as well as credit demand have been impacted by the financial crisis, as well as by government programs to
support financial markets and the housing sector. Banks remain in weak financial health, and thus are unlikely to increase
credit supply by a substantial amount in the near term. Many households will emerge from this crisis with severely damaged
credit ratings, hindering their ability to access credit for years to come.
• Credit underwriting and pricing models developed with data from years prior to this crisis were heavily influenced by our
experience with moderate macroeconomic volatility; this downturn will likely play an outsized role in credit decisions over
the intermediate term.
To obtain a copy of the report, please visit the RIHA website at http://www.housingamerica.org
The Mortgage Bankers Association (MBA) is the national association representing the real estate finance industry, an industry
that employs more than 280,000 people in virtually every community in the country. Headquartered in Washington, D.C., the
association works to ensure the continued strength of the nation's residential and commercial real estate markets; to expand
homeownership and extend access to affordable housing to all Americans. MBA promotes fair and ethical lending practices and
fosters professional excellence among real estate finance employees through a wide range of educational programs and a variety
of publications. Its membership of over 2,200 companies includes all elements of real estate finance: mortgage companies,
mortgage brokers, commercial banks, thrifts, Wall Street conduits, life insurance companies and others in the mortgage lending
field. For additional information, visit MBA's Web site: www.mortgagebankers.org.