Rise In Household Wealth Strengthens Consumer’s Faith In Housing Market

Rising home and equity prices in 2012 are instilling confidence in both homeowners and potential homebuyers. Adding to the positive outlook on the housing market is the significant rise in household wealth. The third quarter of 2012 showed net household wealth increase to $64.7 trillion. That number is projected to rise to $65.1 trillion when the Q4 report is released. This is great news when compared to pre-recession levels when net worth reached $66 trillion in 2007. The recession undoubtedly hit the nation hard, but recovery has showed to be swift and likely to keep a steady increase.

Boost In Equity, Boost in Consumer Spending

Capital Economics explains the likely reason to the rising wealth of the nation: “The rise in net wealth last year was mainly due to the 17% increase in equity prices boosting the value of equity-related assets by $3.6 trillion and, to a lesser extent, a result of the 8% gain in house prices raising the value of real estate assets by $1.0 trillion.” The firm attributes the recent rise in home values to the trend where homeowners’ increase consumer spending as the equity of their home increases. Wealth increased by approximately $4.8 trillion during last year, which leaves it close to the peak reached 5 years ago before the recession.

Consumers are more optimistic about their financial situation in the first month of 2013. Forty-three percent of people expected their financial situation to improve over the next year, a 3% increase from December. People are making more money, which is instilling more confidence in homeowners and homebuyers looking to bounce back into the housing market. Twenty-three percent of respondents said that their household income has significantly improved. Despite this boost in confidence, 38% said that household expenses have increased significantly over the past year.

Stocks Main Reason For Growth

The added enhancement from increasing wealth is said to raise the GDP by 2% this year and by 2.5% next year, according to Capital Economics. “Our growth forecasts will need to be changed only if asset prices rise by much more or fall significantly,” the firm stated. The firm also noted that the rise in wealth is mostly attributed to the rise in stock prices, with the home value improvements secondary.  The report also stated that a rise in the S&P 500 index to 1,600 in 2014 and a continued gain in home prices could add 0.5% next year, too. Nonetheless, both contribute to a confidence in consumers to start buying and selling in the near future.