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Abstract
Home value growth has played an important role in mitigating the effects of the 2001 US economic recession and sustaining subsequent economic growth. Home price appreciation builds home equity, which stimulates consumption expenditures in two ways. The first channel is through a wealth effect on consumption; a number of studies have found that the home equity wealth effect is much stronger than the stock equity wealth effect. Second, home equity extraction through first mortgage refinance or placing of second mortgages enables additional home improvement and consumer durable spending. Home values are driven by local economic conditions, not a valuation bubble; local markets with a strong economy will continue to enjoy house price growth above the national average, while weak economies will also experience weak house price performance.
Notes
Correspondence Address: Frank E. Nothaft, Chief Economist, Freddie Mac, 8200 Jones Branch Drive, McLean, VA 22102‐3110, USA. Email: [email protected]
The opinions expressed are those of the author and do not necessarily reflect those of Freddie Mac.
Home value growth was measured by Freddie Mac's Conventional Mortgage Home Price Index (www.freddiemac.com). The market value of corporate equities and aggregate value of home equity were from the Flow of Funds data released by the Board of Governors of the Federal Reserve System (www.federalreserve.gov). The period of analysis was first quarter of 1970 to the first quarter of 2003.
Homeownership data were from www.census.gov. Stock holdings were reported in Aizcorbe et al. (Citation2003, Table 6).
“Households have been able to extract home equity by drawing on home equity loan lines, by realizing capital gains through the sale of existing homes, and by extracting cash as part of the refinancing of existing mortgages, so‐called cash‐outs. Although all three of these vehicles have been employed extensively by homeowners in recent years, home turnover has accounted for most equity extraction.… Indeed, of the estimated net increase of $1.1 trillion in home mortgage debt during the past year and a half, approximately half resulted from existing home turnover” (CitationGreenspan, 2003).
To identify the amount of mortgage rate reduction and volume of cash‐out activity, we identified refinance loans that Freddie Mac purchased and which paid off a first mortgage loan in Freddie Mac's portfolio. This enables one to directly measure the average rate reduction, as well as the amount of increase in loan balance for a cash‐out refinance. During 2002, the average family reduced its mortgage rate by one and one‐eighth percentage points. Based on the average loan size purchased by Freddie Mac this year (about $130 000–140 000), the average family shaved $100 per month off their mortgage payment, or an estimated $10 billion per year across all families in the USA.
The 2001 American Housing Survey for the USA, Table 2‐1, shows that 84 percent of one‐family houses, condominiums, and cooperatives were owner occupied (www.census.gov).
Housing consumption and corporate profits were from the Bureau of Economic Analysis' National Income and Product Accounts, Tables 2.2 and 6.16 (www.bea.gov), while the shelter component of the Consumer Price Index was from the Bureau of Labor Statistics (www.bls.gov). The period of analysis was the first quarter of 1953 to the first quarter of 2003.
Kindleberger (Citation2000, pp. 42–43) provides a list of speculative frenzies around building sites, agricultural land, and real estate.
There have been many instances of a decline in real national home values since 1950, most recently during the early 1990s. The violent swings in value envisioned by a burst bubble, however, should be manifested in nominal value changes, as was clearly the case with the collapse in the NASDAQ index.
An analysis from the 1990 peak to the 2000 peak would show the same pattern. Regression analysis across 163 metropolitan areas shows a significant positive relationship between income growth and home value appreciation.
The 2001 American Housing Survey for the USA, Table 3‐15, reports that 36 percent of households own their home free and clear of mortgage debt (www.census.gov).
The quarterly model is estimated from the first quarter of 1980 to the first quarter of 2003 and regresses the aggregate mortgage debt service ratio on the homeownership rate, aggregate loan‐to‐value ratio for the single‐family housing stock (the ratio of single‐family mortgage debt outstanding to the value of the housing stock), the annual growth in home values (as measured by the Conventional Mortgage Home Price Index), and the weighted average mortgage rate of 30‐year fixed‐rate mortgages in Freddie Mac's portfolio; the data sources are the US Census Bureau, the Board of Governors of the Federal Reserve System, and Freddie Mac.