Housing Price Impact on Household Income
February 22nd, 2009 by cbaxter.The deflation of the housing bubble (which was fueled by low rates and relaxed lending standards) triggered the current financial crisis and is now impacting Main Street through deteriorating consumer confidence.
Falling home prices are a sure way to turn consumer spending levels toxic, but I think it is more than fiscal conservatism that is triggering decisions. I took a quick look at median home prices (and the year-on-year increases) and compared the gains to the average household income.
The average consumer trend for the last 5-10 years has been to live comfortably, and then refinance surplus debt (credit cards, auto-loans, etc) into the home mortgage. As the mentality that home prices will always go up persisted, it became easier for consumers to associate home gains as additional household income that could be captured through refinancing.
Although based on wide assumptions, the table below shows that consumer incomes were 10-20% higher due to average home price appreciation. This is compounded for people who purchased more expensive homes at higher multiples of their income levels.
Not only has the fall in home prices cut consumer wealth, but it has erased the homeowner’s ability to supplement their household income by tapping into home equity gains.
Until home prices stabilize / appreciate, I don’t see how the economy can increase household income levels by the c. 20% that was provided by home appreciation. Following this logic, I don’t see how consumer companies can capture the domestic earnings to get their prices back up.
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Housing properties are really good, time to time the price or value gets higher and higher.
well, statistically. It never get worst.