Rising Home Prices Have Little Impact On Consumer Spending

The hopeful impact of a housing recovery would be growth in other areas of the economy. It is for this reason that the Federal Reserve continues with QE3 and the purchase of mortgage backed securities. Although mortgage rates are low, homeownership amongst consumers is not bouncing back. In addition, the recovery is being measured by rising home prices which are having little impact on consumer spending.

According to the Bureau of Economic Analysis, U.S. personal spending increased 0.2% in March, mostly due to money being spent on energy over the winter months. This amount was a decrease from 0.7% in February. Consumer spending is the largest source of U.S. economic growth and represents approximately two-third of economic activity.

The S&P/Case-Shiller Home Price Index reported that average home prices increased 8.6% and 9.3% for the 10 and 20 City Composites for the 12 months ending in February 2013. Both composites showed the highest annual growth rates since May 2006. All 20 cities had higher prices for two months in a row for the first time since early 2005. According to CoreLogic's March HPI report, home prices across the nation, including distressed sales, rose 10.5% on a year-over-year basis when compared to March 2012 and was the biggest increase since March 2006.

Even though home prices are rising, the "wealth effect" has not turned into more spending by consumers. Many homeowners are indeed seeing an increase in their home equity, however, they may not be able to refinance their mortgage in order to tap into this additional cash since lenders continue to have tight guidelines. In fact, cash out refinances are not as common as they were in the past and during the housing boom. Many homeowners are instead reducing their principal debt or shortening the terms of their loans in order to eliminate their mortgage faster. According to Freddie Mac, 27% of borrowers who refinanced actually shortened the term of their mortgage and 39% reduced their principal balance in the fourth quarter of 2012.

There are still many homeowners who remain underwater and cannot take cash out of their homes. For these borrowers who have conventional loans, the only option to save some money is to refinance through the HARP refinance program if they are eligible. HARP loans are for mortgages that were sold to Fannie Mae and Freddie Mac prior to June 1, 2009. Even with rising home prices, this program has now been extended to the end of 2015. Homeowners who have FHA loans can refinance through the FHA streamline refinance program which has reduced fees for loans that were endorsed prior to June 1, 2009. There are many underwater homeowners who do not fall into either of these categories and cannot take advantage of low refinance rates since, during the housing boom, their loans were handled by one of the many other types of mortgages available. This is where a HARP 3 program that includes all types of mortgages which would be a benefit for these homeowners and the entire economy.

Even with small job increases, personal income is not rising at a rate that would produce increased spending to the point of a better economy. The Labor Department reported that 165,000 jobs were added in April and that the unemployment rate dropped to 7.5%. While this is good news, there are still millions of consumers out of work, working part time jobs or totally dropped out of the work force. According to the Labor Department, job openings fell in March 1.4% and total hiring declined 4.3%. Even with a falling unemployment rate, the jobs market is lagging way behind what it should be to bring an adequate amount of consumer spending.

The results are that U.S. spending is not getting the boost that was expected through quantitative easing, as well as, rising home prices. Homeowners are now well aware that the old belief, home prices never fall, is not reliable. Instead of spending the equity in their homes, as was done in the past, homeowners are looking to get rid of mortgage debt, the sooner the better. Although any type of housing recovery is good news, this one is not producing the economic growth that was expected.

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