Tales from the “Fake Wealth Effect”
- Joshua M Brown
- March 21st, 2013
Yesterday on CNBC I was lectured about how the wealth effect created by housing's rebound and the stock market's comeback is "laughable" and didn't really exist. Gee, I dunno, sure feels real to me - but what do I know? I only do wealth management for high net worth clients across 36 states.
I should probably spend more time with spreadsheets than actually talking to people to truly understand the wealth effect
So fine, here's the data: We know that US household's have gained back $1.5 trillion in net worth thanks to the housing bounce since 2009. Every trillion bucks in home price gains at the national level should tack on an additional .3 to .5% to GDP according to a paper by Charles Calomiris, Stanley Longhofer, and William Miles. This would equate to an additional $50 to $80 billion in additional consumer spending.
We also know, according to Spectrem Group, that over 400,000 new millionaires were created in America last year thanks solely to the stock market's advance. We are back to 9 million "millionaire households" - up from 6.7 million in 008. I guarantee you that these newly minted or recovering millionaires won't agree that their confidence and desire to get on with their lives is "fake."
Anyway, this morning my inbox was hit with this New York Times breaking news alert:
Sudden Rise in Home Demand Takes Builders by Surprise
...which I found hilarious because it seems like yesterday we were being warned about the next wave of 3 million foreclosures that the banks were about to dump onto the markets, wrecking home prices once again. We were also told about how, demographically speaking, the boomers were going to be downsizing and selling their homes with not enough younger people behind them to absorb all the excess inventory. Oops!
Now, as a rule, when I read articles like this, I ignore the most bombastic quotes - especially the utterances of industry shills like a National Association of Realtors economist or a residential broker - we know there's nothing objective coming from those quarters and reporters love to quote hysteria. But even still, some nuggets from the Times article I think are important:
The housing turnaround seems to have caught almost everyone in the business by surprise. As desirable as the long-awaited improvement may be, the unusually low level of homes for sale is creating widespread problems for buyers and sellers alike, leading to bidding wars...
Nationwide, sales prices rose 7.3 percent over the course of 2012, according to the Standard & Poor’s Case-Shiller index, ranging from a slight decline in New York to a surge of 23 percent in Phoenix. Tracking more closely with the national trend were cities like Dallas, up 6.5 percent; Tampa, which rose 7.2 percent; and Denver, which gained 8.5 percent.
In many areas, builders are scrambling to ramp up production but face delays because of the difficulty of finding construction workers and in obtaining permits from suddenly overwhelmed local authorities. At the same time, homeowners — many of them lifted above water for the first time in years — often remain reluctant to sell, either because they want to wait and see how much further prices will climb or because they are afraid of being displaced in the sudden buying frenzy.
Home for sale listings are down 23% nationally January over January and inventory is at multi-year lows. When you read that in some markets realtors are knocking on doors to find willing sellers, don't be so quick to scoff, I've seen it happening in the town that I live in and my realtor mother confirms that it's happening in the town she covers as well. I realize that Nassau County, LI is not exactly the heartland, but this is occurring in more than just the NY metro area.
We don't have to call it a boom or pretend home prices are racing back to a brand new inflation-adjusted high...but it is a recovery. And like it or not, housing is not the stock market and doesn't turn on a dime. In other words, the feeling of increased prosperity and security that comes from home prices gradually rising - way more important than the stock market wealth effect, by the way - is not something that simply evaporates into the aether a few months after it first gets started. There is a virtuous cycle that takes place when home prices stabilize, begin to rise and this is accompanied by increases in hours worked, in average hourly wage increases, etc.
We're not quite there yet but certainly the compass is pointing in that direction.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.