23 January 2014

American Home Equity Nearly Doubles in 2013, Boosting 2014 GDP

Average home equity went up about 84% last year, which would increase wealth in the average household by about 25%. Additionally, last year's stock market gains drove up household wealth by another 2 to 6%. Combined, rises in home and stock prices drove up household wealth by about 30%.

This increase in household wealth could mean annualized GDP growth in the first half of this year that is nearly double what it was in the first half of last year, which is to say about 4 to 5%.

The numbers, the math, the thinking and the sources below.

First the average home mortgage was $147,591 last year.
Average mortgage debt did not increase through 2013, staying unchanged at 13.182 trillion, so it's safe to assume the average mortgage debt is unchanged as well.
So, my assumption is that average mortgage debt remained unchanged from Dec 2012 to Dec 2013 at $147,591.

Next, home prices rose 11.5% last year to $197,100 from $174,434.

So, in December of 2012, the average household had $26,843 in home equity. ($174,434 - $147,591)
By December 2013, the average household had $49,509 in home equity. ($197,100 - 147,591)
The increase in equity was $22,667, or 84.4%.

Home equity accounts for about 30% of the assets of a typical home whereas stocks and bonds account for only 7% to 15% (depending on how one accounts for "other retirement accounts").

Formula for calculating impact on household wealth is
% of Household wealth represented by the asset X % by which its value rose
For homes, that's 30% X 84% = 25%
For stocks that's 7 to 22% X 26% = 2% to 6%.
25% for home prices + 2% to 6% for stocks = 27% to 31%, or about 30% increase in household wealth.

This increase in net worth could stimulate a big uptick in consumer spending given estimates that for every 10% increase in household net worth, GDP goes up 1.3 percentage points.

Per Greenspan's calculation, this increase of 30% in household wealth would mean an increase of 3.9 percentage points for GDP growth. I'll cut that in half, discounting it "for other factors" to arrive at a number between 4 and 5 percent in contrast to the between 2 and 3 percent growth in the first half of 2013.

You may quibble in the comments. In any case, it's good news for the economy that so many households are no longer under water and others have gained a great deal of lost wealth.

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