Real Estate Articles

Housing Wealth Has Greater Effect Than Stocks, New Study Shows

WASHINGTON (November 30, 2004) – Housing wealth has a more immediate impact on consumer spending than stock wealth and has sustained the U.S. economy since the beginning of this decade, shows a new study produced by the Joint Center for Housing Studies of Harvard University and Macroeconomic Advisers, LCC, and commissioned by the National Association of Realtors^®.

David Lereah, NAR's chief economist, said the study shows a large difference between the impact of housing wealth and stock wealth on consumer spending, particularly during the last economic downturn. "Aggressive cuts in short term interest rates at the beginning of the decade forestalled economic problems and led to record home sales and home equity borrowing," Lereah said. "Without the stimulus, housing's contribution to consumer spending would have been about half as great, the recession much worse and the recovery less robust."

A major finding in the study is that over time, consumers spend about five-and-a-half cents out of every dollar increase in both housing wealth and stock wealth. However, spending from housing wealth only takes about a year to reach 80 percent of its long-run effect, compared with nearly five years for stock wealth to have the same effect – likely because near-term gains in stock wealth could prove to be unsustainable.

"In other words, housing produces a quicker lift to the economy while home-price growth provides lasting benefits," Lereah said. "Homeowners are more confident of gains in housing wealth, so they spend more readily and quickly when they occur."

"Housing Wealth Effects," sponsored by NAR's National Center for Real Estate Research, reviewed a number of existing studies and developed new models to compare wealth effects. The study shows that expansionary monetary policy can provide a rapid and substantial lift to consumer spending under the right circumstances. While some investors pulled out of the stock market when values began to fall in 2000, a near 45-year low in interest rates allowed housing to help the economy through a soft spot.

Regarding speculation about the prospects of a housing price bubble, Lereah said that debt service costs are largely ignored and not well-understood. "In simple terms, over the last year monthly mortgage payments to buy a median-priced home would have taken about 18 percent of the typical family's income. In the early 1980s these costs exceeded 30 percent of family income, so we now have a fair amount of headroom," he said. "The fundamentals of a growing population, tight supply of homes available for sale and rising construction costs will support home prices moving forward."

Home price changes are far less volatile than stock values, but individual returns depend on market conditions in local areas. Between 1983 and 2003, the average deviation in annual value from national price trends in the top 100 metropolitan areas was only 4.7 percent. By contrast, stock values can rise and fall rapidly – even over the course of a single day.

During the period of 2001 to 2003, housing contributed more than one-quarter to consumer spending in each of those years. About half of that boost was attributable to gains in housing wealth through equity withdrawals and realized capital gains, confirming that housing propped up the economy.

In the fourth quarter of 2003, home equity accounted for 19 percent of household wealth, slightly higher than the combination of stocks and mutual funds. However, homeownership is more widespread than ownership of stock and contributes more to the balance sheet of the typical household. Home equity exceeded the value of stock owned directly by households by $2.6 trillion.

Other findings include:

· About 6 in 10 homeowners have more home equity than stock wealth.
· Total housing consumption, operations, related goods and investment came to about 23.1 percent of Gross Domestic Product in
2003. Over the last 50 years, housing has hovered between one-fifth and one-quarter of GDP.
· Housing wealth accounts for 36 percent of the nation's tangible assets. The U.S. Federal Reserve Board estimated the value of
housing stock at $15.2 trillion in the fourth quarter of 2003.
· Late last year, the homeownership rate was 68 percent, but only 52 percent of households held stock – either directly or
indirectly.
· In 2001, the Federal Reserve Board's Survey of Consumer Finances showed that the top 1 percent of stockholders controlled
33.5 percent of stock, while the top 1 percent of homeowners controlled 13 percent of home equity.

Lereah said homeownership has a larger effect than stocks on the typical household's finances. "The broader distribution of homeownership means that changes in stock wealth affect a much smaller share of households and mostly affects those with larger disposable incomes," he said.

In addition, homeowners accumulate significantly more wealth than renters. Analysis shows a renter in 1984 would have accumulated $42,000 in net wealth by 1999. However, a typical owner household in 1984 would have accumulated $167,000 in the same timeframe.

"Most of the differences between renter wealth and ownership wealth reflect the contribution that a leveraged investment in a home provides through appreciation in value, which has been exceptionally strong over the last three years," Lereah said. "Homeownership is unique in that it provides shelter in addition to being an investment that yields a financial return as values rise."

Housing is an attractive investment because it directly builds wealth through both home price appreciation and forced savings in the form of mortgage payments that reduce principal. "It is also appealing because it allows owners to tap into that wealth at favorable interest rates to finance other forms of investment and consumption," Lereah said.

Owners have the option of taking out a home equity loan or line of credit, or taking cash out while refinancing. In addition, when buying another property, they can keep some of the equity from their existing home and use only a portion as a downpayment on another.

The findings in this study suggest that expansion of monetary policy – a lowering of interest rates – at the onset of weakness after an economic expansion can give the economy a significant lift. Conversely, a tightening could slow home sales and reduce equity borrowing, which could quickly act as a drag on consumer spending and slow the economy.

"Accommodative monetary policy through lower interest rates during periods of economic weakness can make the difference between a steep recession and a soft landing," Lereah said.

The National Association of Realtors^®, "The Voice for Real Estate," is America's largest trade association, representing 1 million Realtors^® involved in all aspects of the residential and commercial real estate industries.

SOURCE: http://www.realtor.org/publicaffairsweb.nsf/Pages/HousingWealthHasGreaterEffectThanStocks?OpenDocument

WITH A month to go, the annual record for existing home sales has been shattered. A record-breaking November brought year-to-date sales to 79,382, ahead of the annual record of 78,898 set in 2003.

Toronto Real Estate Board President Ron Abraham said sales are poised to crack the 80,000 mark for the first time in the board's history.

Sales records have now been set in seven of the past 10 years.

"We still expect another 4,000 to 5,000 sales before the end of the year," said Abraham.

A total of 6,301 resale properties changed hands last month, smashing the previous November record of 5,847 set in 2003.

The average price fell to $318,837, down 2% from October. However, some high-rollers were house-hunting in November, as 82 homes worth more than $1 million were sold, and 118 homes worth $750,000 to $1 million traded hands. About four out of every 10 homes sold last month were priced between $250,000 and $400,000.

A combination of low interest rates, a steady influx of people to the Toronto area, healthy employment figures and good economic growth have helped spur real estate sales in the Toronto area.

"Interest rates remain pretty much the critical driver of the housing market," notes Peter Norman of Clayton Research. "Very strong affordability has drawn a lot of tenants into home ownership."

Norman predicts the Toronto area vacancy rate for 2004 could be as high as 4.5%.

NO BIG CRASH

With so many first-time buyers jumped into the market in recent years, a slowing of home sales is likely as the pool of potential buyers shrinks.

"I don't think we'll see things fall off fairly dramatically," said Norman. "It's not going to be a big crash."

He also believes the strong Canadian dollar may eventually affect housing sales as exporters shed jobs.

"There could be some negative implications for the housing market because you're curtailing economic growth and that's going to have an impact," Norman said.

But the strong dollar could also cause the Bank of Canada to be leery of raising interest rates, a boon to homebuyers.

"As long as the dollar remains high, that's going to keep interest rates low which will help stimulate the real estate market," Norman said.

SOURCE: http://www.canoe.ca/NewsStand/TorontoSun/Money/2004/12/04/764758.html

Toronto real estate market report

Last month was a record November and, with 79,382 sales for the year-to-date, 2004 is already the best year the Toronto resale home market has ever experienced, TREB President Ron Abraham announced today.

“The TorontoMLS system recorded 6,301 single-family dwelling sales in November,” said the President. “This is an eight per cent increase over November 2003 (5,847 sales), which was the previous high-water mark for the month. With December still to come, we expect to break 80,000 total sales by the end of 2004, a first in Board history.”

Prices eased to $318,837 in November, a decline of two per cent from the previous month. This was about the same as the decline between October and November 2003, where prices fell one per cent to $301,612 from $304,844. In addition, total inventory came in at 20,273 active listings, up 14 per cent over November of 2003. “This indicates that we are entering a period of relative quiet around the Christmas holiday,” Mr. Abraham said. “However, we still expect another 4,000 to 5,000 sales before the end of the year.”

Breaking down the total, 2,401 sales were reported in TREB’s 28 West districts and averaged $296,689; 1,201 sales were reported in the 14 Central districts and averaged $413,445; 1,221 sales were reported in the 23 North districts and averaged $347,481; and 1,478 sales were reported in TREB’s 21 East districts and averaged $254,278.

SOURCE: http://toreal.blogs.com/durham/watching_the_market/index.html