Alex Kowalski and Elizabeth Dexheimer

Rising home values could soon spur consumer spending

For the first time since the recession, there is potential for rising property values to boost consumer spending and give the economy a nudge. A projected 2 percent gain in home values next year will start to lift consumer spending in the second half of 2013, says Michelle Meyer, senior economist at Bank of America Corp.

Meyer predicts the wealth effect will add 0.1 percentage point to spending per quarter, swinging from a 0.9 percentage point drag in the depths of the housing crisis in 2009.


‘‘There are a lot of encouraging signs in the housing market,’’ Meyer said. ‘‘It will still be a gradual recovery unless you see the overall economy turn stronger.”

The lowest mortgage rates on record, a smaller inventory of available homes, and a drop in distress sales have fostered the pickup.

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Single-family home values climbed 3.8 percent in July from a year earlier, the biggest 12-month gain since August 2006, CoreLogic said last week. Prices last quarter posted their first year-over-year increase since 2007, according­ to Zillow, operator of the largest real estate website.

Rising home values stimulate household spending through a channel economists call the wealth effect. A rule of thumb is that for every dollar increase in housing wealth, consumers will purchase an average of 4 cents more, Meyer said.

The impact is widespread. Primary residences accounted for 30 percent of total family assets in 2010, making housing ‘‘of greater importance than financial assets for the wealth position of most families,’’ Federal Reserve researchers wrote in June. About 66 percent of US homes were occupied by their owner — as opposed to renters — in the second quarter, Census Bureau data show.


Yet it will take time for the full impact of the recovery in housing to show up in consumer spending. Rising home prices spur spending with a lag, meaning the wealth effect won’t show up this year, Meyer said.

From 2007 to 2011, the slide in home values cut real estate wealth by $6.7 trillion, an amount equal to about 43 percent of the overall economy, UBS Securities LLC economists wrote in an Aug. 24 research note. Wealth may have increased $600 billion in the first half of 2012, they wrote, noting the boost in spending may come sooner than Meyer forecasts.

The reversal will provide ‘‘meaningful support’’ to growth, lifting consumer spending by as much as 0.5 percentage point at an annual rate, UBS economists say. That could help the US economy expand by 2.1 percent this year and 2.3 percent in 2013, they wrote. ‘‘Homes are for most people the largest asset that they hold, so if there’s a recovery not only would there be an improvement in net worth, but there would also be a potentially even more important psychological impact,’’ said Drew Matus, a senior­ economist at UBS.

Borrowing against a home, nonetheless, is harder for many people since the recession, damping some of the wealth effect. Just one of 58 senior loan officers surveyed by the Fed said credit standards were easier in July than in 2005; 40 said they’re tighter.

Alex Kowalski and Elizabeth Dexheimer write for Bloomberg News.
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