Rise in Household Wealth Could Bolster Home Buying

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U.S. households were $2 trillion wealthier at the end of the second quarter compared to the first quarter of 2009 according to a report recently released by the Federal Reserve. This was the first time in two years that household net worth increased.

The Federal Reserve reported that household wealth rose 17 percent in the second quarter to $53.1 trillion. The size of the wealth gain was $2 trillion compared to the previous quarter. Even with the quarterly increase, household net worth is $12.2 trillion below its peak in 2007, reflecting a significant collapse in stock values and home values.

During this past year, households have deleveraged their balance sheets by paying down a meaningful portion of their debt. Household debt decreased 1.7 percent to $13.7 trillion in the second quarter. Debt has declined for four consecutive quarters and is now 5 percent below its 2007 peak. Household debt fell for 9 consecutive quarters before this second quarter increase.

The improved financial situation of U.S. households is encouraging news for the housing markets. For the past several years, a substantial decline in household wealth has been a primary inhibitor for housing demand. Households did not have the financial wherewithal to purchase big ticket items such as automobiles and homes even in a favorable interest rate environment. The second quarter rise in household wealth is a positive step towards remedying this situation this situation.

At present, several market factors favor a housing rebound: increased household wealth, historic low mortgage rates, an improved credit market, and a recovering economy. The three major measures of housing activity—existing home sales, new home sales and housing starts—have trended upward since the beginning of this year. Most economists project steady, but modest, advances in these housing measures for the remainder of this year.

However, the housing sector still faces some obstacles that threaten its recovery including falling home prices, job losses, the expiration of the $8,000 tax credit and a mounting foreclosure problem.

From Real Estate Economy Watch