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Economy

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Homes up; spending may follow

‘Wealth effect’ expected as property values rise

– For the first time since the recession, there’s potential for rising U.S. property values to boost consumer spending and give the economy a nudge.

Housing’s wealth effect has been a drag on household purchases since 2008. A projected 2 percent gain in home values next year will start to lift consumer spending in the second half of 2013, according to Michelle Meyer, senior economist at Bank of America Corp. in New York.

Meyer predicts the wealth effect will add 0.1 percentage point to spending per quarter, swinging from a 0.9 percentage point drag at the height of the housing crisis in the first quarter of 2009.

The contribution represents a long-awaited turning point at a time when a struggling labor market impedes wage growth and manufacturing provides less support for the three-year expansion.

“There are a lot of encouraging signs in the housing market,” Meyer said. “It will still be a gradual recovery unless you see the overall economy turn stronger, but price data continues to come in strong even into the summer and early fall. I definitely have gotten more convinced of the turn in housing.”

Home prices in the second quarter increased 2.2 percent from the previous three months, the best performance since the end of 2005, according to S&P/Case-Shiller data. The lowest mortgage rates on record, a smaller inventory of available homes and a drop in distressed property sales have fostered the pickup.

Adding to signs of a recovery: confidence among U.S. homebuilders climbed in September to the highest level in more than six years, according to the National Association of Home Builders/Wells Fargo builder sentiment index released last week.

In Europe, German investor confidence last week rose for the first time in five months in September after the European Central Bank unveiled a plan to buy government bonds to stem the sovereign-debt crisis.

CoreLogic said this month that single-family home values in the United States climbed 3.8 percent in July from a year earlier, the biggest 12-month gain since August 2006. Prices last quarter posted their first year-over-year increase since 2007, according to Zillow, the operator of the largest real-estate information website.

Rising home values stimulate household spending through a channel that economists call the wealth effect, which posits that homeowners lift spending in proportion to anticipated changes in wealth over time. A common rule of thumb is that for every dollar increase in housing wealth, consumers will buy an average of 4 cents more, according to Meyer.

The effect is widespread because of the role that homes play in Americans’ portfolios. Primary residences accounted for 30 percent of total family assets in 2010, making housing “of greater importance than financial assets for the wealth position of most families,” Federal Reserve researchers wrote in June using the most current data.

About 66 percent of U.S. homes were occupied by their owner – as opposed to renters – in the second quarter, Census Bureau data show.

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