The Federal Reserve reported yesterday a continued rise in home values, offering a boost to household wealth. From 2006 to 2011, housing wealth fell from $23 trillion to $16 trillion, a loss that devastated the U.S. economy. Our research estimates that almost half of the decline in spending during the Great Recession can be attributed to the decline in house prices.
So the rise in housing wealth–reported to be back up to $19.4 trillion–must be great news for household spending, right? Well, unfortunately, the story is a bit more complicated. The rise in housing values over the past two years has been unconventional, driven by a strong price rebound in foreclosed properties and increasing participation by investors. This is not your 2002 to 2006 housing boom–it is fundamentally different, and therefore unlikely to fuel household spending to a significant degree.
The macroeconomic data may hide this fact, but a look at the microeconomic data makes it more transparent. Below, we provide charts based on city-level data, where we look at the relation between house price growth, the share of purchases by investors, and foreclosures. City-level data help us see why house prices are rising. For example, house prices in Phoenix, Arizona have risen sharply. Phoenix also saw a huge amount of foreclosures during the housing crisis, and a large number of investor purchases in the past three years. In general, are cities with strong house price growth the same cities where there was a bad foreclosure crisis? Are they cities where we see many investor purchases? Our analysis below examines these questions. In our charts, each dot is a city where the size of the dot reflects the population of the city, and we also plot the regression line that shows the relation between the two variables.
Here is the correlation between house price growth from 2010 to 2013 in a city and foreclosures per homeowner during the foreclosure crisis. As the red line shows, there is a strong positive relation — house prices have rebounded much stronger in cities that went through a horrible foreclosure crisis.
The strong house price rebound in high foreclosure-rate cities likely reflects these markets bouncing back after excessive price declines. But these foreclosed properties are not being bought by traditional owner-occupiers that plan on living in the home. Instead, they have been bought by investors in large numbers.
Here we plot the change in the fraction of homes bought by investors in a city against foreclosures per homeowner. The investor-share data come from DataQuick, where we count an investor purchase as one in which the buyer provides a zip code in the mailing address that is different than the zip code of the property she is buying. The change in investor share purchases in a city is the average share of all purchases by investors in 2010, 2011, and 2012 subtracting off the 2006 investor purchase share.
As the red regression line shows, cities with worse foreclosure crises from 2008 to 2010 saw a much larger increase in investor purchases in 2010, 2011, and 2012. These two charts lead to the following insight: house price gains over the last three years have been driven to a large degree by investors buying up foreclosed properties. The following chart shows the relation between house price growth from 2010 to 2013 in a city and the share of investor purchases:
Most know that homeownership rates have fallen since the Great Recession. These correlations suggest that a substantial share of the rise in house prices have been driven by properties that are being converted from owner-occupied to investor-owned.
This has implications for the effects of rising home values on household spending. Our research has shown that lower credit score, lower income homeowners have by far the highest marginal propensity to borrow and consume out of housing wealth. These are exactly the households that have likely exited homeownership through delinquency and foreclosure. Investors tend to be much richer than the average household–a rise in the value of investor-owned property will likely have almost no effect on their spending.
We can see the mitigated effect of rising home values on spending by looking at borrowing directly. Here is the evolution of house prices and cash-out mortgage refinancing–where a household takes money out of their home. The chart plots both from 1998 through 2013.
During the housing boom prior to the Great Recession, cash-out refinancing closely tracked house price growth. When house prices rose, people cashed out equity. However, something changed over the past three years. House prices are rising, but cash-out refinancing remains extremely low. This reflects in part the fact that the types of homeowners that would normally spend out of their housing wealth are no longer homeowners. The “housing as an ATM” channel is not nearly as strong as it was from 2002 to 2006.
This is not to say that household spending in recent years has been unaffected by credit markets. There has been a sharp rise in non-mortgage debt in recent years, particularly auto debt. Has the rise in these other types of debt helped fuel spending? We plan on addressing this question in a future post.