Elevated home prices could turn out to be a blessing in disguise. Why would we say rising home prices are good for some U.S. consumers? Well, it gets back to how the housing market relates to consumer spending.

In this latest edition of LPL Street View, Chief Economist Jeffrey Roach discusses three facts about the U.S. consumer that make us believe that the average U.S. consumer could be stable enough to weather the inflationary storm clouds this year, as well as support our thesis that a recession this year is not likely.

First, consumers improved overall debt service payments last year by taking advantage of historically low interest rates. Mortgage refinancing activity in the first half of 2021 was double the long-term average, yet not quite as high as the all-time refi boom in 2003. So what does this mean in real terms? Well, it means that borrowers saved over $2,800 dollars annually in mortgage payments by refinancing last year.

Second, borrowers took advantage of high house price growth to cash out equity. In other words, rising home prices means those with home equity in effect got a raise in net worth. Given the low rates last year, homeowners were able to extract equity through cash-out refinances. So as interest rates fall, we know cash out share declines so therefore, it’s quite reasonable to believe that cash out activity this year could likely decline from last year’s levels.

Third, the robust residential real estate market is helping the households who need it most. Looking at the last few years, we can see that lower-income households were increasingly taking advantage of low interest rates and reducing their payments by refinancing their mortgages and taking cash out of one of their most important appreciating assets: their homes.

In sum, recession risks remain, but our base case is no recession as consumers, particularly the upper income ones can sustain spending pattern from income growth, excess savings, revolving consumer credit and as highlighted in this video, the wealth effect from rising home equity.

 

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