Twin Engines of Growth: Confidence and Home Equity

March 23, 2017

Homeowners in the U.S. have become wealthier just by being homeowners.  According to the Federal Reserve’s household flow of funds data, the average homeowner went from $85,000 in home equity in the year 2011 to $167,000 in 2015.  As of today, in early 2017, the average homeowners equity is more than DOUBLE what it was in 2011.  The amount of equity people have in their homes is now equal to where it was in 2006, at the top of the housing market boom!

This surge in home equity has supported a steady increase in home improvement spending, and in particular an increase in spending on major home projects.  This is a result of two effects:  (1) an increase in paper wealth, which makes people feel more open to spending money on improving their home and their lifestyle, and (2) people who need to borrow money to finance a home improvement project are able to do so more easily as a result of their higher level of equity.

We have also seen a surge in consumer confidence lately, which serves to reinforce the equity effect.  The dual effects of rising home values and increasing confidence have fueled strong increases in the business confidence reported by homebuilders and remodelers.

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