It’s a riddle, wrapped in a mystery, inside an enigma.  Perhaps Winston Churchill’s famous bon mot about the difficulty in understanding Russians should have been reserved for figuring out what’s afoot with the US housing market these days.  If you cling to tradition, the recovery in the US housing market should be great news for consumers. It is a recovery, once again, now that the pending home sales territory returned to growth territory with its first increase in nine months back in March.  For the second half of the last year and into early 2014, economists fretted that the uptick in interest rates (and thus in mortgage rates) as well as the generally higher sale prices would have a dampening effect not just on home buying but on those oh-so-critical elements of our national wellbeing: wealth and economic growth.  The theory runs something like this: for any homebuyer, their home becomes their main asset. And when our assets increases in value, we are wealthier – more importantly, we feel wealthier. And we’re more confident; we behave as if that wealth is real and not just on paper, willing to spend more of our other income.  Theoretically we feel under less pressure to squirrel away more of our income if our home is increasing in value more rapidly than our savings might. All of that spending adds up and spills over into the economy.  So much for that theory.  Right now, however, it just doesn’t look as if even a slightly healthier US housing market is of much help to the overall economy.  Consider: the Bureau of Economic Analysis released its second estimate of real gross domestic product for the first quarter. It dropped, by an annual rate of 1%.  In two of those three months, housing sales activity was still falling. But prices remain high.  So, what’s afoot? Two academics have a theory.  Atif Mian of Princeton and Amir Sufi of the University of Chicago’s Booth School of Business suggest thinking of housing as a force capable of generating and sustaining an economic boom is so, well, 20th century. The traditional ways that an increase in home value filter through into broader economic activity simply no longer work in the new economic universe in which we find ourselves, post-2008.  In fact, housing is not a moneymaker. Sufi calculates each dollar of new housing wealth may generate only a penny of extra spending. There are reasons for that.  Firstly, homebuilders aren’t rushing out to build in response to the rise in prices by building more houses.  Then, as most of us know by now, you can’t treat your home like an ATM machine any longer, even if you felt inclined to do so.  Tougher mortgage lending standards mean that banks want better reasons to refinance a house. They don’t want to keep refinancing homes just in order to let their owners pull out some of the cash.  As prices rise, banks prefer that increased value create a cushion of safety for both the bank and the homeowner.  It’s pure self-interest on the part of the banks, of course, but it’s also good news for homeowners.  Borrowing more against your home than you have to against the value of your home, simply because it’s possible, makes no more sense than borrowing against your retirement funds.  Moreover, note Mian and Sufi, “the households who would be most likely to spend out of housing wealth are no longer homeowners.” Welcome to Foreclosureville.  Who are the biggest beneficiaries of the uptick in housing prices?  Many are families who somehow managed to hang on to their homes through the bleakest years of the post-crash environment. The lucky ones are now seeing the price gains drag the value of their homes back out of the red – but that doesn’t mean that they’re feeling wealthy or spending lavishly, or indulging in any of the behaviors that might generate big economic growth.  The other group are already-wealthy Americans, who don’t need the real estate market’s help to be encouraged to spend a little bit more. They’ve taken advantage of foreclosure sales and other bargains to snap up investment properties, or simply to trade up in the market. But the spillover effect on the broader economy is minimal, except to the extent that they’re spending on renovating those homes.  Indeed, there’s an argument that rising home prices could end up being a drag on the economy, to the extent that those newly-purchased homes end up as rental properties. The still-tough mortgage lending standards mean that many first-time home buyers are shut out of the market, along with other potential middle-class homeowners. The result? Many are forced to become – and remain – renters. And if the jury is now out on whether home ownership is unambivalently as “good” a thing for the economy as it once was, there’s no question that renting is a drain on your finances, and thus on the economy as a whole.  And the surge in demand for rental properties has – logically enough – sent rents higher. A recent study by Harvard University’s Joint Center for Housing Studies revealed that nearly half of all renters are forking over more than 30% of their income on rent. That’s a double whammy: lower economic growth today and, down the road, we’ll have tossed that money away on rent, rather than investing it in mortgage payments on an asset that has risen in value.  It could be that the housing market, and the mortgage market, are still in a kind of wacky no man’s land in the aftermath of the once-in-a-lifetime crash of 2007/2008. The fate of mortgage giants Fannie Mae and Freddie Mac remains unknown; the securitization market hasn’t revived; the banks still haven’t developed solid new approaches to real estate lending.  But for now, relying on real estate to somehow jumpstart the entire American economy and return it to growth mode sounds like little more than wishful thinking.
The stubborn idea that a high-priced house equals wealth doesn't stack up in the new world of rentals, where your home doesn't help the economy