CHICAGO--()--In the November issue of Themes on the Economy®, Chief Economist Diane Swonk declares, “Rising home values are a game changer because they make it easier for consumers to decide to spend and invest in their homes, and ultimately, sell what they bought at a profit.” Swonk calls that resulting boost to consumer sentiment, “important because the wealth effects tied to housing are much larger than those tied to equity holdings.”
“Rising home values are a game changer because they make it easier for consumers to decide to spend and invest in their homes, and ultimately, sell what they bought at a profit.”
Consumers have more confidence but also more money on hand to spend on their homes. “Refinancing has increased, reducing mortgage payments and leaving more for consumers to spend each month,” says Swonk, noting that pent-up demand has been building for simple renovations and improvements, including carpets, furniture and repainting. That kind of demand can provide a big boost to the economy because homeowners typically spend more on household fixtures; “the spending multipliers attached to rental properties are inherently smaller than those tied to home ownership,” she reminds us.
Swonk also details how some external shocks, specifically destructive storms like Sandy and the Northeaster that followed, can perversely stimulate the economy. “We could even see a sharp acceleration in spending, above the baseline for the holidays, as rebuilding and repairs get underway.” The flip side is that kind of catalyst can “redistribute spending away from discretionary and towards necessary, storm-related purchases;” that could divert consumer dollars from the usual holiday spending on gifts.
One potential fly in the ointment is the fiscal cliff, the certain tax increases and spending cuts if Congress does not make at least a temporary pact on the budget before January 1, 2013. That’s something that so far has worried businesses more than consumers.
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