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 2007 and 2008 plunge in housing prices – and only partial rebound – changed how consumers see housing as a way to accumulate wealth.

 

Nonetheless, consumers who are homeowners often can still tap into their home equity when needed. The wealth accumulated in the nation's housing stock is still consequential to consumer spending as is stock market wealth. Indeed, data suggest that an increase in housing market wealth has about twice the impact on consumption than an equivalent increase in stock market wealth. As long as home values appreciate, consumers can utilize the equity in their home to finance new cars, vacations and other consumption expenditures.

 

Short Term Perspective

Housing wealth data come from the flow of funds report which is released with a long lag. The house price index compiled by the Office of Federal Housing Finance Agency (FHFA) 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 2014, housing demand softened after shortages of supply for housing markets placed upward pressure on prices in 2013. Housing demand then stabilized and prices began to move higher in the spring of 2015 before slowing through year end.

 

FHFA house price index rose a sharp 0.8 percent in September and was up 6.1 percent on the year, while Case-Shiller's monthly adjusted 20-city index rose 0.6 percent and was up 5.5 percent on the year.