Homeowners spending cautiously as values surge
Dean Schefrin bought a home at just the right time.
He and his then-fiancee purchased their four-bedroom Thousand Oaks, Calif., home last August, catching the rising wave of Southern California home prices. Less than a year later, he estimates his home is worth about 25 percent more than he paid.
"It is just a really nice feeling," the 45-year-old said. "It's sort of peace of mind."
The last time housing prices rose this quickly, homeowners rushed to tap their home equity to spend on renovations, cars, vacations, even second homes. The economy soared – until it crashed in a heap of debt.
Five years after the financial crisis, a new sobriety among homeowners and lenders has taken hold, tempering economic growth as consumers keep more money in their pockets.
Schefrin is putting off getting a pool he wants in his backyard until he saves enough cash.
"It's going to be based on the work income and not the value of the house," he said.
Many other homeowners are feeling the same way, economists say. Historically, surges in home prices have resulted in what economists call a wealth effect – increased spending based on individual perceptions of growing affluence. But the hangover from the housing crash has blunted that phenomenon, economists say.
Historically, every dollar increase in home prices has generated 8 cents in consumer spending over the following 18 to 24 months, said Mark Zandi, chief economist at Moody's Analytics. That figure has been cut in half during this recovery, he estimated.
"They are spending a bit more," he said. "But it's nothing like it was pre-bust."
The recovery will need to draw on other sources of economic growth, said Amir Sufi, an economist at University of Chicago's Booth School of Business.
"My bottom line is that we need to temper our optimism on what a housing recovery can do for the U.S. economy," Sufi wrote in a recent paper.
That's a good thing, in the long term, he said. During the boom, homeowners with low credit scores were much more likely than others to borrow against their home equity, he said. Today, many of those people either can't qualify for a loan or have lost their home to foreclosure.
"Any time you rely too much on housing or house price growth for economic growth, it usually ends badly," Sufi said in an interview.
The gains in wealth since the economy hit bottom are nonetheless startling. Household wealth rose to a record $70.3 trillion at the end of the first quarter, according to the Federal Reserve, with rising home values accounting for one-fourth of a $3 trillion increase from the prior quarter.
Last year, 1.7 million homeowners escaped negative equity positions, according to CoreLogic. An additional 850,000 homes entered positive territory in the first quarter of this year.
The Standard & Poor's/Case-Shiller 20-city index of home prices rose 2.5 percent in April, the largest monthly growth on record. The data go back to 2000. Compared to the year before, prices were up 12.1 percent.
That has banks more willing to allow people to tap their homes' equity. Wells Fargo & Co., the nation's largest mortgage lender, has seen more demand for home equity products, especially in regions with steep home price increases, said Kelly Kockos, a senior vice president at Wells Fargo.
But the mind-set has changed. The inquiries are more focused on much-needed home improvements or debt consolidation, Kockos said.
"It used to be more desire-driven – a fancier car or vacation," she said. "I think people have learned from the past."
Gaby Halcovich endured that painful lesson.
He borrowed $100,000 against the equity in his Los Angeles home in 2006 to invest in his lighting fixture business. The firm moved to a bigger warehouse, purchased equipment and hired employees, Halcovich said.
When the bubble popped, he lost his business and watched his home plummet in value.
The property's value has since risen, and Halcovich and his wife saved money by refinancing. Now, he estimates, they have about $60,000 in equity in the house.
Does he feel wealthier?
"Not at all."
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