NCPA - National Center for Policy Analysis

New Theory for Spending Boom

July 6, 1999

The common wisdom is that the "wealth effect" created by soaring stock prices is responsible for high levels of consumer spending and accelerating economic growth. But some economists credit an altogether different phenomenon: the robust appreciation in home values.

  • The National Association of Realtors estimates that the median value of a single-family home has risen 50 percent over the past 10 years -- to about $133,100.
  • Over two-thirds of American families live in homes they own.
  • The Joint Center for Housing Studies at Harvard University finds that heavy refinancing and other activity last year pumped hundreds of billions of dollars into the economy -- by allowing homeowners to borrow against their home equity, thus freeing up cash through lower mortgage payments.
  • The Federal Reserve estimates that since 1995, home sales have yielded an average of about $35,000 in capital gains for a total economic impact of $150 billion annually.

The effect of those dollars has been amplified since 1997, when a new tax law sheltered the first $500,000 in capital gains made on the sale of a married couple's residence.

Bank One estimates that "cash out" refinancing -- when homeowners get cash up front in exchange for a bigger mortgage -- contributed about $60 billion in extra income for consumers last year. Mortgage lender Freddie Mac reports that 51 percent of borrowers who refinanced last year pulled out an average of 11 percent of their homes' equity.

The Federal Reserve reports that home-equity borrowing hit $420 billion in 1997. Meanwhile, monthly mortgage payments have dropped in real terms over the past 10 years by 19 percent -- to $681 in 1998 compared to $840 in 1989. The Harvard study puts this savings to consumers at about $2 billion a year.

Economists believe a large amount of this extra money is spent and very little is being saved.

Source: Tristan Mabry, "This Boom, Some Say, Is on the House," Wall Street Journal, July 6, 1999.


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