Stocks are up again, but home prices are the real barometer of personal wealth.
FORTUNE ? U.S. stocks have reached new highs, but most Americans probably don't feel any wealthier. That's because the prices of our homes have a bigger influence over how rich we feel and, therefore, how much we're willing to spend, suggests a recent study by the National Bureau of Economic Research.
The findings clarify the big drivers of what economists call "the wealth effect," the idea that people spend more when they have more. This sounds pretty obvious, but the real barometer of wealth hasn't been as clear. In the past, as the Federal Reserve moved to buy up billions of dollars worth of bonds to boost the economy, Chairman Ben Bernanke said that higher stock prices boost consumer wealth. And in turn, the extra spending helps the economy grow.
While that might be true, as it turns out, home prices trump any run-up on Wall Street. This is probably not that surprising, given that most Americans have relatively modest amounts of?cash tied up in equities, 401ks, IRAs and investment accounts.
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For most Americans, the value of their homes reflect how wealthy they feel, according to the study by economists, including well-known U.S. housing market authorities Karl Case and Robert Shiller.
In looking at the housing market's latest boom and bust, they found that households spend more when home prices go up. And unlike the results of their earlier study, they spend less when prices fall. If prices popped like they did between 2001 and 2005, household spending would rise 4.3%. And if prices plummeted like they did between 2005 and 2009, spending would drop 3.5%.
If we look at what's happening today, the findings might explain why the stock market's rally hasn't really helped the economy grow that much faster. Last year, the Standard & Poor soared 13%, adding almost $1.9 trillion to the value of stocks. This was the biggest gain in three years. Stocks have continued to soar, with the S&P 500 climbing 4.8% so far this year -- a five-year high.
When the housing market crashed in 2007, prices spiraled more than 30% nationwide. They've rebound, rising 5.9% in 2012. That's the largest annual increase since close to the peak of the last housing bubble in 2006. While the improvement has helped thousands of borrowers reclaim what they originally paid for their homes, prices would have to increase much higher to save the millions more borrowers who owe more on their mortgages than their properties are worth.
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During the third quarter of 2012, 100,000 underwater borrowers returned to positive equity, owing less on their mortgages than what their homes are worth, according a report released last week by CoreLogic. This change drove down the share of underwater mortgages relative to all home loans to 22%, or 10.7 million, compared with 26% recorded in January 2012.
In a healthy housing market, 5% of borrowers are underwater.
Indeed, we have a long way to go before many households return to normal. In the years leading up to the housing market bubble, prices rose so high and then fell so low in places like Florida and California that it's hard not to wonder if it will take another market bubble before underwater borrowers fully recover.
What is perhaps surprising is that areas that saw some of 2012's biggest jumps in home prices are also places with the biggest problems with distressed borrowers: Nevada had the highest percentage of underwater mortgages at 59.6% of all home loans, followed by Florida at 42.1%, Arizona at 38.6%, Georgia at 35.6% and Michigan 32%. Together, these states make up 24% of the total amount of negative equity nationwide, according to CoreLogic.
Where prices go will depend largely on the job market in these areas. For 2013, Wall Street expects home prices nationwide to climb between 3% to 9.7%. That's significant, but for borrowers whose mortgages are still underwater, feeling any richer still feels very far away.
Source: http://finance.fortune.cnn.com/2013/01/25/why-americans-still-feel-poor/
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