- The Washington Times - Monday, August 13, 2001

D. Alexander is sitting on a gold mine. The Washington businessman never expected the spacious Adams Morgan apartment he bought 20 years ago to more than quadruple in value to nearly $700,000 — most of that gain in the past three years.
Now, at 59, he is faced with the pleasurable choice of using his newfound wealth to help fund his retirement or cashing in some of the gains to finance business expansion plans. Already, the paper wealth has inspired him to spend a little money sprucing up the 72-year old dwelling.
Mr. Alexander is sharing in a bonanza that two-thirds of Americans who own their homes are enjoying in big ways and small. A stunning $2.5 trillion rise in housing value in the past three years has provided homeowners with windfalls of wealth, and they are finding it easier than ever to tap into that wealth.
With a phone call to the bank, many homeowners through refinancing are cashing out home equity to pay for home improvements, consolidate debt and fund dream vacations and other purchases. Others take out home-equity loans to finance the purchase of sport utility vehicles or their children's college educations.
As with many homeowners, the unexpected gain in home value has been a kind of consolation prize for Mr. Alexander, who lost money in the stock market in the past year.
"I was trying to make money in the stock market and other places, but it turns out the best investment I ever made was buying this apartment," he said.
Because households are tapping into their home equity at unprecedented rates, economists say the trend is providing a little-noticed source of strength to consumer spending and the economy, bolstering confidence and keeping spending on track despite rising unemployment and debt.

Buoying the economy
Federal Reserve Chairman Alan Greenspan recently testified that the unexpected jump in home values has played a critical role in keeping the economy out of recession despite downturns in the stock market, manufacturing and technology this year.
"The housing sector has been a very important contributor to the American economy and, I think, one of the major reasons why that litany of negatives which you can easily line up has not in fact cracked the economy's underlying stability," he told the Senate Banking Committee.
"The rise in the value of homes — which if anything has accelerated during this period of rapid decline in stock prices — has created a very substantial buffer of unrealized capital gains, which are being drawn down through the home equity market, through cash-outs, through the turnover of existing homes," he said.
The Fed's big interest rate cuts this year helped create the boom in home sales, which also has been fed by high levels of household employment and incomes.
The home sales market also has gained momentum while the rest of the economy foundered because the surge in home values in itself has become an inducement for many homeowners to sell so they can reap the gains or leverage the equity to buy bigger houses.
The "wealth effect" from rising stock prices got much attention when households were enjoying double-digit gains in the stock market and was credited with adding a full percentage point to consumer spending and economic growth from 1996 to 2000.
The recent "wealth effect" from escalating home values has received less attention, though it is more important to the average American, said Sun Won Sohn, chief economist with Wells Fargo & Co., the largest mortgage lender in the United States.
Homes account for almost all the wealth of the average household, he said.
"The rising value of homes, not the wealth effect from stocks, is a key driver for consumer spending," he said. "To be sure, the importance of stocks in household wealth has increased over the last decade," growing to one-third of household assets from 13 percent in 1989, he said.
But much of the stock wealth is locked up in retirement plans and cannot be easily accessed. By contrast, consumers have been widely tapping into the equity in their homes by doing cash-out refinancings and have learned that this pays off even if they don't get lower interest rates.
The average amount of cash taken out in refinancing was $18,000 in 1998 and probably has risen with the boom in home prices since then, providing consumers with substantial one-time windfalls to spend, Mr. Sohn noted.
Even first-time homeowners, who had little equity in their homes when they bought with small down payments in the 1990s, are taking advantage of sizable gains in home value to eliminate costly mortgage insurance and second-trust loans.
By any measure, home prices have been soaring, posting nearly double-digit gains in the past three years on average. In June, the median price of existing homes rose to a record $152,600. That is up 8.8 percent from a year ago, the strongest gain in a decade.
Price increases have been even more spectacular in the Washington area, where in some neighborhoods real estate values have doubled and even tripled in the past three years.
A Harvard University housing report this spring found that 24 metropolitan areas posted home-price appreciation of 20 percent or more during the 1990s. It said the run-up in housing prices surpasses the 1980s' housing boom.
The Harvard report questioned whether the huge price gains are sustainable. Cities that experienced such booms in the 1980s saw losses of 10 percent in home prices in the early 1990s.
The report also questioned whether the rise in home values was fostering wealth so much as increased debt, since consumers have been so quick to turn their housing assets into liabilities.
"Borrowing was so heavy over the 1990s that home equity as a share of home value dropped 10 percentage points, even as housing prices rose sharply," the report said. The result is that today's $5 trillion in mortgage debt outstanding exceeds the debt of corporations and the federal government.

A bane to renters
The boon to homeowners is a bane to the one-third of Americans who rent, analysts say. Rents have been escalating along with home prices, putting a burden on low and moderate-income earners and leaving them with less money.
The Harvard study found that more than 14 million households spent more than half their incomes on housing in 1999.
Dean Baker of the Center for Economic Policy Response said the recent run-up in housing prices most likely is the result of investment moving out of the stock market into housing after the stock market bubble burst last year. He said the housing market may be in an unsustainable bubble.
Edward Yardeni of Deutsche Banc Alex. Brown said the Fed may have inadvertently created a bubble in housing prices with its aggressive rate cuts. The interest rates on 30-year mortgages are historically low at just over 7 percent.
Joel Prakken of Macroeconomic Advisers said the run-up in housing, while impressive, has not been big enough to offset the $4 trillion in stock losses that hit households in the last year. It is mostly acting as a shock absorber for shell-shocked stock investors, he said.
At the end of 1999, stock wealth totaled $17.6 trillion while housing wealth totaled $9.4 trillion, he said. Stock values fell to $13 trillion by the first quarter of this year while housing values grew to $10.2 trillion, narrowing the gap.
Nevertheless, Mr. Prakken estimated that consumer spending out of the steady increase in housing wealth accounts for about 15 percent of spending growth at a time when consumers as a group have single-handedly been holding up the economy.

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