Long Term Perspective

In the old days, one thought of accumulating wealth by saving, investing and building equity in one’s home. It was certainly considered a good idea to purchase a home and build equity because housing was one of the few investments that kept up with inflation for the most part. While housing prices have surged and collapsed over the years, the hot housing market of the past ten years will be legend.

Since consumers can tap into their home equity and easily refinance their home loans – the wealth accumulated in the nation’s housing stock has become as consequential to consumer spending as stock market wealth. Indeed, Stephen Cecchetti, now a Brandeis University professor and formerly head of research at the New York Federal Reserve Bank, has noted that an increase in housing market wealth has about twice the impact on consumption of an equivalent increase in stock market wealth. (“Why Federal Reserve must raise interest rates,” Financial Times, August 7, 2005) As long as home values continue to appreciate, consumers can utilize the equity in their home to finance new cars, vacations and other consumption expenditures today instead of saving for the future. A housing collapse, though not predicted by the majority of pundits who are worried about a bubble, could quickly lead to a consumer spending meltdown. However, due to the increase in housing supply overhang during the first half of 2007, some economists are forecasting a modest decline in housing prices on average into 2008.  This is expected to vary according to local housing market conditions.

Wealth figures are available quarterly, although with a long lag, from the Federal Reserve’s flow of funds data. Notice that annual changes in housing wealth tend to move in tandem with housing prices.  

Short Term Perspective

Housing wealth data come from the flow of funds report, which is released with a long lag. This house price index compiled by the Office of Federal Housing Enterprise Oversight (OFHEO) is a broad measure of the movement of single family house prices and seems to move in tandem (albeit not exactly by the same magnitude) as housing wealth. In 2006, a surge in mortgage debt cut into growth of housing wealth, leaving housing prices up notably more than housing wealth for the year. In 2007, we have seen a slowing in both mortgage debt and housing prices.