For building wealth, there's no place like home

OUTLOOK

Appreciation puts jingle in owner's pocket

November 07, 1999|By Amanda J. Crawford

HOME SALES account for about one-sixth of the so-called wealth-effect spending, Federal Reserve Board Chairman Alan Greenspan said last week in Orlando, Fla., at a conference on mortgage lending sponsored by America's Community Bankers. The capital gain on the sale of the average existing home "generally far exceeds" the down payment on the seller's next home, he said. Fed economists estimate that the average profit from the sale of an existing home over the past five years was more than $25,000 after expenses. Because a decline in home prices is rare, Greenspan said, individuals are likely to spend profit from the sale of their homes more rapidly than gains from stock appreciation because they view the gain as a "largely permanent" increase in wealth.

Are Americans indeed cashing in on their homes and spending the money? Are home sales a major factor in the economic boom? How significant a role will wealth from home sales play in future economic growth?

Scott Brown

Chief economist, Raymond James & Associates, St. Petersburg, Fla.

It's not like everybody is turning in their homes to cash out their capital gain, but certainly it is a significant factor in the strength of consumer spending we've seen over the last couple years. It's not the only factor: we've had some pretty substantial gains in inflation-adjusted income. We've also had wealth gain from the stock market. Now we are seeing home sales kind of edge down to a probably more sustainable pace. So, they may be less of a boost to spending than what we've seen.

Kathleen Camilli

Chief economist,

Tucker Anthony, New York

The wealth-effect consists of two things: the appreciation of your home and taking the equity out of it, and the rise in overall value in your financial assets. Since your home is still the largest portion of your net worth, the rise in the equity in your home is a bigger contribution to the wealth-effect than stock prices. But we saw in the '80s that housing prices can go down as well as up. So, while the population is expanding and the demand for new homes will go hand in hand with that, it's not necessarily the case that the value for homes will always go straight up.

There has been a huge positive wealth-effect from the rise in equity prices and home values. Just as the two have had a positive effect in consumption spending, any disruption in the rise could result in a negative wealth-effect.

Zoltan Acs

Distinguished professor of entrepreneurship, University of Baltimore

If you really look at American wealth, only about half of Americans own stocks. Most Americans that own stocks do not own huge amounts of it and they don't pull it out of the market and spend it. Most people have it in there for the long run and have it in mutual funds for retirement.

When you look at the wealth of the average American family, the house is the single largest source of their wealth. It is very likely that people sell a house, make a down payment on another and spend the difference. That's a major stimulus for the economy, for all of a sudden they end up with $50,000 -- which is the average family income -- and they are spending that. And remember the big kicker: it's tax-free on both ends. The money [interest] you pay on your house is tax-deductible, and when you sell your house, you don't have to pay taxes on that. Whereas if you have stocks, you have to declare it as income.

William Cheney

Chief economist, John Hancock Financial Services, Boston

In general, when people feel there is a capital gain, they have felt able to splurge. It is a relatively well-established phenomenon that when the housing market in a particular city is doing well, you see a lot of new cars.

I think it is true that people tend to spend gains from home sales more readily than from stock prices. If you look ahead, I think it is likely it will be a continuing part of consumer balance sheets and consumer wealth for at least the next 10 to 15 years. After that if you look in the long run, baby boomers will be getting old and trying to cash out their houses, and maybe there won't be enough people to buy them.

There is quite a lot of interesting data on the psychology of finance that suggests that people treat different gains differently. An increase in home price, especially when you've sold it, is going to feel like real money. Whereas the stock market for most people has the air of "funny money." It's almost sort of gambling winnings. You're not likely to treat it as a real, permanent increase in wealth, not right away. In a way, people are right to treat it that way; stock prices are more volatile than home prices. Any gain in stock prices is less likely to be there next week with the gain in home prices.

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