What can keep
economic
consumers going strong?
watch
by Kim Kennedy, Economics Editor
In the early years of the new Housing Enterprise Oversight priced homes (the “housing bubble” )
millennium, consumers continued (OFHEO), house prices gained and the potential impact of a bust on
to spend at a fast clip – despite 7. 4 percent in 2002, 7. 9 percent in both the housing market and the overall
the ordeals of job losses and rising 2003, 12. 1 percent in 2004 and 13.0 economy. Mortgage rates have also
unemployment. Non-farm employment percent in 2005. That means a home begun to rise, although they remain at
reached a peak in early 2001 and then valued at $100,000 in 2001 would historically low levels. Rates reached
declined until late 2003. Despite job gains have been worth roughly $146,800 by 6. 3 percent in March after dipping to
in 2004, total employment remained the end of 2005 – creating $46,800 just 5. 6 percent in June 2005.
below the 2001 peak. in new equity, or almost half of the Even if the housing market does not
It was not until 2005 that levels original home value. Moreover, these burst, it has surely reached peak levels
of employment returned to, and figures represent national averages, of activity and is destined to slow over
eventually surpassed, their pre- and appreciation in some states the next few years – both in terms of
recession peak. Under these draconian and metropolitan areas has been levels of activity and in gains to home
conditions, it was an increase in dramatically higher than the average. prices. Furthermore, in some of the
wealth, rather than income, which Mortgage refinancing has helped most heated areas of the country, home
enabled consumers to continue to get this equity into consumers’ hands prices are likely to decline.
spend. From 2003-2005, household to spend. Historically low interest
net worth recorded the largest three- rates have encouraged homeowners to Consumer spent?
year growth on record – and largely refinance their mortgages, and many Does this mean that the consumer
supplanted income as the underlying have taken a considerable amount of is finally “spent”? With more than
support for spending. equity out of their homes to either two-thirds of GDP dependent upon
But where did this newfound spend or invest. Mortgage rates fell consumer spending, does this mean
wealth come from? Two sources largely to a low of just 5. 2 percent in June that the economy, too, is destined to
account for household assets – the value 2003 (the lowest level since the early slow? Don’t give up too quickly on the
of equity from household real estate 1960s). But since that point, rates have American economy or its consumers.
(homes) and the value of financial assets barely moved. Despite considerable More than half a million jobs have
(largely, the stock market). Clearly, the monthly movement, annual rates been created by this economy in the
value of homeowner equity has risen remained virtually unchanged from first three months of 2006 (590,000
strongly across the nation over the past 2003-2005 (at 5. 8-5. 9 percent). to be exact) – suggesting that the
few years. More recently, the news has been pendulum might be swinging back to
According to the Office of Federal peppered with information about over- income as a generator of consumer
activity, rather than wealth. There’s also
a significant lag between the creation
of wealth and its impact on spending,
so we probably will continue to feel the
13.0 positive effects of higher home prices
on spending for some time.
12. 1 Moreover, the stock market looks
7. 6 like it is about to pick up steam again,
7. 5 7. 4 7. 9 after lagging behind corporate income 4. 5 5.0 for several years, so even the wealth
2. 6 effect could continue to be positive. 2. 1 4. 6 5. 1 0.2 0.8 The Bottom Line: Yes, the U.S. 1. 9 2. 6 economy is changing and the housing
’90 ’91 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 market will no longer be a dominant
Source: Office of Federal Housing Enterprise Oversight (OFHEO) force in growth. But, plenty of other
Home price appreciation has been one of the primary drivers in the increase of drivers are poised to take over where
household wealth in recent years, outpacing growth of financial assets. the housing market leaves off. ▲
Home price appreciation
(Q4 to Q4 Percent Change)
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0
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1
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JAM Graphics
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