The Great Recession in 2008 and 2009 demonstrated the tremendous influence of housing on the U.S. economy. For many U.S. households, the home is the single largest asset and one that bears significant levels of debt. At the height of the financial crisis in the first quarter (Q1) 2009, the value of U.S. homeowners' equity plummeted 33.4% from the prior year, leaving many households "under water" on their mortgages and wiping out, in some cases, their entire net worth.1
Today, while the housing recovery is still in its early stages, we are seeing this influence of housing on the economy work in the opposite (more positive) direction.
In June 2012, we highlighted the acceleration of U.S. home prices, which has continued into Q1 2013. The most commonly followed home price index, the S&P/Case-Shiller Index, rose 6.8% in December 2012 from the prior year and accelerated to 8.1% in January of 2013.2
The U.S. Federal Reserve (Fed) tracks a related measure of the aggregated value of U.S. household real estate, which by its estimate rose 8.7% year-over-year in the fourth quarter (Q4) 2012.3 The Fed’s data also indicate that, on average, American households held mortgage debt of approximately 53% of the value of occupied real estate, down from 60% in Q4 2011.
This powerful combination of rising home values and declining (debt) leverage resulted in the value of U.S. household equity rising a stunning 25% year-over-year in Q4 2012 (see chart right).4 To put this in context, the equity value of real estate in the U.S. rose at a greater pace in Q4 2012 than any period during the housing bubble (albeit from far lower levels), and faster than any other period in the past 60 years.5
The strong improvement in the equity value of U.S. real estate has been a significant contributor to the overall rise of U.S. household net worth. Amid significant headwinds in the form of historically high unemployment, ongoing budget stalemates in Congress, and the burden of higher taxes, it’s worth noting that U.S. household net worth has nearly fully recovered to the prior peak levels seen in 2007 (see chart right). In Q4 2012, U.S. household net worth stood just 2% below its all-time high. This strong recovery in household balance sheets has been perhaps the most important driver of continued consumer spending growth, even in the face of the multiple headwinds mentioned above that are often cited more frequently in the mainstream media.
A related measure of financial health for U.S. consumers is the household-financial obligations ratio, published quarterly by the Federal Reserve. This ratio looks at a broad range of payments made by consumers—on mortgage debt, consumer credit, rent, automobile leases, and other financial commitments—all compared to disposable income.
Due primarily to today’s historically low interest rates, the ratio today sits near its lowest level in the history of the data (see chart right). The data likely reflect the improvement in finances for employed households generating disposable income; however, a full and broad economic recovery will continue to require improvement in both payrolls and unemployment levels.
Despite numerous challenges, U.S. household finances have improved substantially over the course of the past three years due to a combination of rising net worth and significantly lower "carrying costs" of household debt. Given the tremendous influence of housing on the U.S. economy, further healing has the potential to offset more frequently cited headwinds of higher taxes, stubbornly high unemployment, and uncertainty in Washington.
2. Source, S&P/Case-Shiller home price index: Haver Analytics.
3. Source, Federal Reserve household real estate value: Haver Analytics.
4. Source, Federal Reserve household real estate value: Haver Analytics.
5. Source, Federal Reserve household real estate value: Haver Analytics.