November 30, 2004 03:32 PM
Housing Wealth Reverberates
Excerpt: Homeowners who watch the value of their houses climb aren't reluctant to spend a portion of that growing wealth, pumping about 5 1/2 cents for every dollar increase in home equity back into the economy, a study released Tuesday finds. News Source
Homeowners who watch the value of their houses climb aren't reluctant to spend a portion of that growing wealth, pumping about 5 1/2 cents for every dollar increase in home equity back into the economy, a study released Tuesday finds.
And while that is the same amount of spending that comes from every dollar increase in stock wealth, consumers take much longer to part with stock gains, in part because they think those gains are more likely to evaporate, the study shows.
That more-immediate impact of housing wealth has provided major underpinning for the U.S. economy this decade, according to the study produced by the Joint Center for Housing Studies of Harvard University and Macroeconomic Advisers and commissioned by the National Association of Realtors.
That stimulus was particularly helpful during the downturn of 2001 and 2002, said David Lereah, NAR's chief economist.
While some investors pulled out of the stock market when values began to fall in 2000, a near 45-year low in interest rates allowed housing to help the economy through a soft spot.
"Aggressive cuts in short-term interest rates at the beginning of the decade forestalled economic problems and led to record home sales and home-equity borrowing," Lereah said. "Without the stimulus, housing's contribution to consumer spending would have been about half as great, the recession much worse and the recovery less robust."
Spending from housing wealth only takes about a year to reach 80 percent of its long-run effect, compared with nearly five years for stock wealth to have the same effect -- likely because near-term gains in stock wealth could prove to be unsustainable, Lereah said.
"In other words, housing produces a quicker lift to the economy while home-price growth provides lasting benefits," Lereah said. "Homeowners are more confident of gains in housing wealth, so they spend more readily and quickly when they occur."
The analysis, "Housing Wealth Effects," reviewed a number of existing studies and developed new models to compare wealth effects. The study shows that expansionary monetary policy can provide a rapid and substantial lift to consumer spending under the right circumstances.
From 2001 to 2003, housing contributed more than one-quarter to consumer spending in each of those years. About half of that boost was attributable to gains in housing wealth through equity withdrawals and realized capital gains, confirming that housing propped up the economy.
In the fourth quarter of 2003, home equity accounted for 19 percent of household wealth, slightly higher than the combination of stocks and mutual funds.
However, homeownership is more widespread than ownership of stock -- more than two-thirds of U.S. households are homeowners while only about half own stocks -- and contributes more to the balance sheet of the typical household.
About 60 percent of U.S. households have more home-equity than stock wealth. Home equity exceeded the value of stock owned directly by households by $2.6 trillion at the end of 2003.
Other findings in the study include:
- Total housing consumption, operations, related goods and investment came to about 23.1 percent of gross domestic product in 2003. Over the last 50 years, housing has hovered between one-fifth and one-quarter of GDP.
- Housing wealth accounts for 36 percent of the nation's tangible assets. The U.S. Federal Reserve Board estimated the value of housing stock at $15.2 trillion in the fourth quarter of 2003.
- Late last year, the homeownership rate was 68 percent, but only 52 percent of households held stock -- either directly or indirectly.
- In 2001, the Federal Reserve Board's Survey of Consumer Finances showed that the top 1 percent of stockholders controlled 33.5 percent of stock, while the top 1 percent of homeowners controlled 13 percent of home equity. Lereah said homeownership has a larger effect than stocks on the typical household's finances. "The broader distribution of homeownership means that changes in stock wealth affect a much smaller share of households and mostly affects those with larger disposable incomes," he said.
- Homeowners accumulate significantly more wealth than renters. Analysis shows a renter in 1984 would have accumulated $42,000 in net wealth by 1999. However, a typical owner household in 1984 would have accumulated $167,000 over the same time. "Most of the differences between renter wealth and ownership wealth reflect the contribution that a leveraged investment in a home provides through appreciation in value, which has been exceptionally strong over the last three years," Lereah said.
More Mortgages To Be 'Conforming' - Nov 30, 2004
Realtors Engage In Turf Battle With Discounters - Nov 28, 2004
Expanding The American Dream Commitment - Nov 26, 2004
'Tis the Season to Fix Up Your House - Nov 26, 2004
Sell Your Home — Fast - Nov 26, 2004
Most Expensive Gated Communities In America 2004 - Nov 26, 2004
Exchanging Real Estate Tax Free - Nov 25, 2004
Home Equity For The Holidays? OK, With Caution. - Nov 25, 2004
Does It Pay To Save? - Nov 23, 2004
The High Earner/Poor Saver - Nov 20, 2004
Six-Figure Zip Codes - Nov 20, 2004
Buyer's Home Feature Preferences Reflect Lifestyles - Nov 16, 2004
Pattern of Strong Home-Price Gains Continues in Most Metro Areas - Nov 16, 2004
