News and Events

May 3, 2007

Housing in the New Economy

Housing In The
New Economy

By Broderick Perkins

Outpacing the flaccid, once technology-driven stock sector as an investment tool, the more potent housing market has hammered home its position as a cornerstone of the economy's foundation -- and it appears to have much more staying power.

Consumer spending is the real petrol that powers the economic engine and housing wealth is proving to be a stouter grade of fuel than stock market investments. Housing and all its related transactions -- purchasing, furnishing, maintaining, improving and investments -- accounted for 23.1 percent of Gross Domestic Product in 2003 and over the past 50 years that figure has been as high as 25 percent.

Consumers spend about five-and-a-half cents out of every dollar increase in both housing wealth and stock wealth. Spending from housing wealth, however, takes only a year or so to reach 80 percent of its long-run wealth effect, compared with nearly five years for the same effect from stock market investments," according to "Housing Wealth Effects," produced by the Joint Center for Housing Studies at Harvard University and Macroeconomic Advisers, LCC.

"In other words, housing produces a quicker lift to the economy while home-price growth provides lasting benefits," said David Lereah, the National Association of Realtor's chief economist.

"Homeowners are more confident of gains in housing wealth, so they spend more readily and quickly when they occur," he added. NAR's National Center for Real Estate Research commissioned the study.

For years, many homeowners have known the feeling of owning, something once called the "psychological equivalent of gold," and the new Harvard study helps second that emotion. The new study also says:

* About six in 10 homeowners have more home equity than stock wealth. The percentage is higher among lower income households, according to another study.

* Housing wealth accounts for 36 percent of the nation's tangible assets.

* Late last year, the home ownership rate was 68 percent, but only 52 percent of households held stock.

* 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.

A less scientific study by EscapeHomes.com revealed earlier this year that homes in select second home markets were appreciating even faster -- by as much as twice as fast as the rest of the housing market. Strong anecdotal evidence also points to a growing trend of investors who traded in stock market investments for residential real estate -- both those who won and lost during the dot com boom and bust era.

That's due in part to a near 45-year low in interest rates appearing just as many small investors were pulling out of the stock market when values began to fall in 2000, the Harvard study says.

Acquired equity, along with low interest rates, has allowed many laid off, outsourced and otherwise unemployed homeowners to "eat their home" or live off the equity gain until better days arrived.

The study also reiterated the intrinsic tangible value of home ownership as physical shelter that also shelters owners from taxes while yielding a financial return.

There is also value in home buying as a highly leveraged investment. Buyers get a large piece of the rock for a small, upfront investment in the form of a down payment and closing costs.

In return "investors" build wealth in two ways -- through price appreciation and via forced savings in the form of mortgage payments that shrink the principal.

"It is also appealing because it allows owners to tap into that wealth at favorable interest rates to finance other forms of investment and consumption," Lereah said.

A growing number of homeowners are doing just that and they are rolling their returns right back into real estate in the form of home improvements and second home purchases.

The NAR-commissioned study isn't without an ominous edge. Its findings suggest that an expansion of monetary policy -- a lowering of interest rates -- at the onset of economic weakness can boost the economy. On the other hand, higher interest rates could slow home sales, reduce equity borrowing, curtail consumer spending and send the economy into another tail spin.

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