The United States economy has a long way to go even as home values rise and the job market improves.
The United States economy has a long way to go even as home values rise and the job market improves. Consumer spending is one of the most important economic barometers in the U.S., and it seems to refuse to return to its levels before 2008. According to Bloomberg's Rich Miller, the wealth effect traditionally created by equity in the American housing market is not materializing to the point that the Federal Reserve Bank desires.
More Saving, Less Spending
The wealth effect from housing was clearly felt in the early 21st century due to a real estate bonanza that homeowners thought would never end. American consumers tapping into the equity of their homes became spendthrifts who saw their properties as ATMs. Cash-out refinances and home equity lines of credit fueled a spending craze that helped the overall economy even as Americans failed to put away money for savings.
Although not many homeowners are able to refinance for cash due to tight credit conditions, the few who are tapping into their equity are not spending their loan proceeds. Instead of cash-out refinances, borrowers are more likely to reduce the terms of their mortgage or even buy down their balances. This means that homeowners are more interested in saving than spending at this time, and they are hedging themselves against another housing downturn.
Home Equity and the Federal Reserve
The U.S. housing market is currently estimated by the Fed to be worth $8.2 trillion. This is an improvement over the dark days of 2009 when the housing market was only $6.2 trillion, but it is still a long way from its $13.5 trillion high in 2006.
The ongoing recovery of the housing market and its improved equity levels owe a great deal to the Fed's efforts to stimulate the economy. The Fed intends to keep purchasing mortgage-backed securities until home equity levels motivate borrowers to treat their homes like ATMs once again. This means more easy money for institutional investors, but there is a strong chance that the wealth effect of yesteryear may never return to the U.S. economy.
Consumer spending is recovering, albeit slowly. American consumers are not only reluctant to access their home equity; they are also less likely to run up their credit cards these days. The current gains in consumer spending are mostly due to measured spending of cash and savings; should this trend continue, the American economy will take longer to enter a significant boom.
