In response to the drop in wealth suffered as a consequence of the 2008 financial crisis, homeowners and firms did attempt to increase savings in financial assets by reducing expenditure on durables.
Sentiment: NEGATIVE
Within a few months in 2008, household finances were crushed as asset values fell, millions of jobs were lost, countless credit cards were canceled, and thousands of homes were foreclosed on.
Many savers are also homeowners; indeed, a family's home may be its most important financial asset. Many savers are working, or would like to be.
The decline in home equity makes it more difficult for struggling homeowners to refinance and reduces the financial incentive of stressed borrowers to remain in their homes.
Well-functioning financial systems are important in achieving sustained economic growth. They play a crucial role in channeling household savings into the corporate sector and allocating investment funds among firms.
Millions of Americans were duped by the federal government and the Federal Reserve into buying homes they could not afford and failed to count the cost. When the financial crisis of 2008 hit, they could not keep up the monthly mortgage payments and defaulted.
Savings is an important tool because it can help the poor deal with the ups and downs of irregular earnings and help them build reserves for a rainy day.
Many financial innovations such as the increased availability of low-cost mutual funds have improved opportunities for households to participate in asset markets and diversify their holdings.
It is hard to be enthusiastic about the economy's prospects when house prices are falling: Households spend less, small business owners can't use homes as collateral for loans and local governments are forced to cut jobs and programs as property-tax revenue disappears.
Homeowners who refinanced their mortgages took out cash and reduced their monthly payments at the same time. Much of the cash obtained by refinancing was spent on consumer durables, home improvements and the like.
For most, the largest asset is their home. This becomes a sentimental issue, I know, but if you're holding on to a home that you can no longer afford - or you need the liquidity - you need to think about solutions. One might be to bring in a tenant or roommate; a more drastic measure is to sell the home and downsize.
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