More Evidence of Consumer Caution

The housing sector has always been a vital part of economic growth and for a variety of reasons. There is the obvious impact of buying a home—the largest investment that most people make in their lifetime. Then there is the process of furnishing and landscaping it. We all know the costs of maintaining a home and that supports a great many people and businesses.

Additionally, people accumulate value in their home through the equity they build over time. That equity is what has traditionally allowed people to borrow and spend money on everything from projects to vacations or some other acquisition. At the very least, the equity in the home makes owners feel wealthier than they were before and thus more likely to spend.

Data show that people now have more equity in their homes than at any time since the recession. There are fewer underwater mortgages than there have been in more than 20 years. In many communities, home values have reached pre-recession levels and beyond. There has been 45% more access to equity than last year, but this is still less than a quarter of the access that took place prior to the recession starting in 2008. Today’s homeowner is far more cautious and that affects the impact of that accumulated home equity.

This is yet another example of the paradox of economics—what is good for the individual is not necessarily good for the economy as a whole. People are saving and guarding their financial position, which is a good move for the majority of the population. Nobody seeks a return to the days of being leveraged to the hilt and then suddenly plunged into crisis by some kind of financial reversal. All of this caution, however, robs the economy of much of the vitality needed to avoid that financial reversal in the first place.

Analysts assert that many homeowners are now becoming aware of how much equity they actually have and that they are starting to relax about the state of the economy. In many cities, the price of homes has risen substantially from the lows of just a few years ago. It is now far easier to sell at a profit and that equity is beckoning. The expectation is that many will start to use that equity again, and when that takes place, the economy will get a substantial boost. The trick will be for consumers to access that equity without putting themselves in the position they were in a few years ago.

It seems there is always a pendulum swing between overly cautious behavior and the recklessness that characterized the period prior to the recession. The mood of the consumer thus far remains careful, and there doesn’t seem to be a desire to become profligate again, but conditions can change rapidly. Right now, the consumer is still wary about job growth, and generally speaking, election years depress the overall population.

- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence

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