Study: Housing Wealth Has Greater Effect Than Stoc
Washington, DC, December 1--Housing wealth has a more immediate impact on consumer spending than stock wealth and has sustained the U.S. economy since the beginning of this decade, shows a new study produced by the Joint Center for Housing Studies of Harvard University and Macroeconomic Advisers, LCC, and commissioned by the National Association of Realtors.
David Lereah, NAR's chief economist, said the study shows a large difference between the impact of housing wealth and stock wealth on consumer spending, particularly during the last economic downturn. "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."
A major finding in the study is that over time, consumers spend about five-and-a-half cents out of every dollar increase in both housing wealth and stock wealth. However, 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.
"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."
"Housing Wealth Effects," sponsored by NAR's National Center for Real Estate Research, 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. 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.
Regarding speculation about the prospects of a housing price bubble, Lereah said that debt service costs are largely ignored and not well-understood. "In simple terms, over the last year monthly mortgage payments to buy a median-priced home would have taken about 18 percent of the typical family's income. In the early 1980s these costs exceeded 30 percent of family income, so we now have a fair amount of headroom," he said. "The fundamentals of a growing population, tight supply of homes available for sale and rising construction costs will support home prices moving forward."
Home price changes are far less volatile than stock values, but individual returns depend on market conditions in local areas. Between 1983 and 2003, the average deviation in annual value from national price trends in the top 100 metropolitan areas was only 4.7 percent. By contrast, stock values can rise and fall rapidly – even over the course of a single day.
During the period of 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 and contributes more to the balance sheet of the typical household. Home equity exceeded the value of stock owned directly by households by $2.6 trillion.
