The nascent housing recovery is beginning a shift from economic headwind to tailwind, creating the indirect effect of giving average American households hope to, once again, begin to retain a level of wealth.
Of course, being in America, the feeling of wealth is best described as a family’s healthy relationship with their overall composition of debt — and this is one relationship that is still changing.
“The wealth effect is multi-faceted: It is partly due to the psychological lift resulting from higher home values, i.e. the perception of a stronger household balance sheet position actually supports spending,” said Deutsche Bank (DB) analyst Carl Riccadonna in a note to clients. “More directly, price appreciation enables households to refinance debt, thereby reducing interest expenses, as well as tap into home equity via lines of credit or cash-out refinancing.”
The second detail is particularly interesting as, according to recent Federal Flow of Funds data, HELOCs and refis represent a large portion of the shrinking mortgage debt.
However, the wealth effect may also be empowering households to take on more debt in other areas.
According to monetary policy consultant Bert Ely of Ely & Company, the changes in the way households are taking on debt is “not inconsequential.”
Ely reports that Fed data shows consumer debt is growing around 10% annually.
“There are concerns people are becoming over-indebted, because of the confidence they obtain from lowering, or getting rid of the mortgage debt, even via write-offs and short sales,” he said.
“Look at the strong apartment construction,” Ely adds. “Let’s say more households become renters, they still need cars and credit cards.”
Ely adds that the perceived wealth effect is not likely to create a large drag on the economy, compared to the leaps forward home price appreciation provides to home owners.
“Whenever you are in a turning point in economic cycles, there are speed bumps as you get through the turn,” he said.
Deutsche Bank’s Riccadonna added that even small moves in home prices can have large effects on consumption, because housing comprises such a significant share of household assets.
“Based on previous analysis, we are projecting home price appreciation of 5-10% in 2013, which translates into a further increase in household assets, i.e. wealth creation, ranging between $860 billion and $1.72 trillion,” he said. “To be sure, the wealth effect on consumer spending could be substantial.”
