Ivan Illán is an award-winning financial services entrepreneur and bestselling author.
In behavioral economics, there’s a theory that correlates spending behavior to the value of their assets. It’s called the wealth effect and could be an even more impactful factor in future economic growth than ever before. Considering the historic increases experienced in home equity over the past several years and the more ubiquitous nature of homeownership versus that of the stock market, referencing home values for indications on consumer and business spending could prove more prudent than usual.
The probability of a consumer-led recession initiated by a widespread decline in home values, especially after its meteoric rise, could be higher than you may estimate. Large stock market returns have been great too, but who’s been benefitting from those? According to the Federal Reserve, 70% of all U.S. stocks (held directly or indirectly, like through mutual funds or ETFs) are owned by the top 10% of income earners (defined as having an income greater than $173,136). This means that the remaining 90% of Americans own just a small minority of corporate stock shares.
Homeownership, however, is much more prevalent at all income levels. Unlike stocks, homes can be acquired by accumulating enough for a down payment and then financing the balance via a mortgage. As a result, the median income across all homeowners is $52,000. Looked at another way, the homeownership rate between 2010 and 2017 for people who earned more than $150,000 per year was 87%. Even lower-income earners, like those from $30,000-$74,999, have a homeownership rate of 64%. This shows just how much more Main Street’s exposure is to home values relative to Wall Street’s stock market prices.
According to data compiled by the Federal Reserve, U.S. homeowners’ equity from June 2013 to September 2021 increased by 154%. During the same period, the level of the S&P 500 Index increased by 168%. Though these triple-digit increases are similar, their paths couldn’t have been more different. As an example, during 2020’s market turmoil, the S&P 500 lost 30.75% year-to-date through March 23. Meanwhile, homeowner’s equity increased 2.93% through March 2020 from the year’s start. This significant disparity could not only illustrate a benefit of real asset diversification but also the psychological comfort derived from price stability, a support to stay the course on continued ownership. Afterall, you can’t live in a stock portfolio.
Most have only distant memories of the global financial crisis (GFC dates, September 2007 to March 2009). Homeowners’ equity plummeted from a March 2006 peak of $13.5 trillion to $6.180 trillion by March 2009—more than a 50% loss. It wasn’t until September 2015 that homeowners’ equity had recovered to the March 2006 peak—more than a decade later. By comparison, the S&P 500 Index hit its pre-GFC peak in October 2007, and then recovered to the same level by March 2013—a little over five years on.
Low-interest mortgages have likely been a primary driver for the housing market’s recovery. Add in housing supply shortages and changing labor dynamics (such as work-from-home), and the housing market recovery may have become another asset bubble. Looking forward, low-interest mortgages are less likely, as the Federal Reserve has made clear its intention to raise rates several times beginning this year. Another pricing pressure will come from the significant amount of construction currently underway nationwide, which will increase housing supply. The possibility of both increasing housing supply and higher-interest mortgages would weigh heavily on the market’s current price equilibrium, resulting in a negative wealth effect for most Americans.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation. CRN202502-1932229