Housing wealth has a more immediate impact on consumer spending than stock wealth and has sustained the U.S. economy since the beginning of this decade, shows a new study produced by the Joint Center for Housing Studies of Harvard University and Macroeconomic Advisers, LCC, and commissioned by the National Association of Realtors.

Aggressive cuts in short term interest rates at the beginning of the decade forestalled economic problems and led to record home sales and home equity borrowing. Without the stimulus, housing's contribution consumer spending would have been about half as great, the recession would have been much worse and the recovery less robust.

Spending from housing wealth only takes about a year to reach 80 percent of its long-run effect, compared with nearly five years for stock wealth to have the same effect. In other words, housing produces a quicker lift to the economy because home-price growth provides lasting benefits. Homeowners are more confident of gains in housing wealth, so they spend more readily and quickly when they occur.

While investors pulled out of the stock market when values began to fall in 2000, a near 45-year low in interest rates allowed housing to help the economy through the soft spot. In simple terms, over the last year monthly mortgage payments to buy a median-priced home would have taken about 18 percent of the typical family's income. In the early 1980s these costs exceeded 30 percent of family income.

Home price changes are far less volatile than stock values which can rise and fall rapidly ' even over the course of a single day.

During the period of 2001 to 2003, housing was responsible for more than one-quarter of consumer spending this is attributable to gains in housing wealth through equity withdrawals and realized capital gains, confirming that housing propped up the economy.

In the fourth quarter of 2003, home equity accounted for 19 percent of household wealth. Home equity exceeded the value of stock owned directly by households by $2.6 trillion.

· About 6 in 10 homeowners have more home equity than stock wealth.
· Housing wealth accounts for 36 percent of the nation's tangible assets (15.2 trillion) The homeownership rate was 68 percent, but only 52 percent of households held stock ' either directly or indirectly.

Homeowners accumulate significantly more wealth than renters. Analysis shows a renter in 1984 would have accumulated $42,000 in net wealth by 1999. However, a typical owner household in 1984 would have accumulated $167,000 in the same timeframe.

Most of the differences between renter wealth and ownership wealth reflect the contribution that a leveraged investment in a home provides through appreciation in value, which has been exceptionally strong over the last three years. Homeownership is unique in that it provides shelter and directly builds wealth through both home price appreciation and forced savings in the form of mortgage payments that reduce principal. It is also appealing because it allows owners to tap into that wealth at favorable interest rates to finance other forms of investment and consumption. Owners have the option of taking out a home equity loan or line of credit, or taking cash out while refinancing. In addition, when buying another property, they can keep some of the equity from their existing home and use only a portion as a downpayment on another.


CONCLUSION: The lowering of interest rates ' at the onset of weakness can give the economy a significant lift by increasing home sales and equity borrowing, which could quickly acts quickly to stimulate consumer spending and support the economy. This can make the difference between a steep recession and a soft landing.