Wednesday, May 7, 2014

Why Home Price Gains Aren’t Lifting the Economy - Source: Wall Street Journal

Why Home Price Gains Aren’t Lifting the Economy
Source: Wall Street Journal
Analysis of whether housing has lived up to its true potential as a catalyst for a stronger recovery has led experts to argue that while housing stopped being a drag on the economy a few years ago, it has failed to propel strong economic growth. Professors Atif Mian of Princeton University and Amir Sufi of the University of Chicago argue that rising home prices haven’t done much to stimulate the economy.
Making sense of the story
  • The professors conclude that the home price gains of the past two years have had fewer knock-on benefits for the economy than in the past because those gains have done little to stimulate either new-home construction or increased spending paid for by home-equity borrowing.
  • They argue current rising home prices won’t greatly stimulate the economy because gains that simply restore lost wealth aren’t as valuable as gains that create new wealth.
  • Consequently, prices may need to rise even higher for the economy to enjoy any “wealth effect” because it is at that point when people will spend more because they feel richer as their home or stock portfolio rises in value.
  • Growth is also deterred by tight lending standards, which have made it tougher for homeowners to take cash out of their homes with either a second mortgage or by refinancing into a larger first mortgage.
  • Also, prices haven’t risen enough to encourage homeowners to sell, which is creating inventory shortages that are being blamed for sluggish sales volumes and higher prices.
  • And while home prices are up, they’re still not up enough to encourage builders to build more homes because they face higher land, labor, and supply costs.