Home equity – the difference between the value of a home and the amount of mortgage debt on the home – is an important component of overall household wealth. Changes in the amount of home-equity wealth will be primarily affected by growth in home values and pay down of mortgage loan balances. For the last few years, home-value appreciation has been the major creator of wealth. During 2017, the national CoreLogic Home Price Index rose by more than 6 percent, the largest annual increase since 2013. Likewise, home-equity wealth rose more in 2017 than any other year since 2013.
The latest CoreLogic Equity Report found that the average homeowner gained about $15,000 in home-equity wealth during 2017, with larger gains in areas that were high-cost and had faster appreciation. For example, the average home owner in California and Washington had a wealth gain of about $40,000, reflecting the high price of homes in California and the rapid appreciation in Washington. (Exhibit 1) In contrast, the average owner in Louisiana had little change in their housing wealth, given the much lower prices and more modest price growth.
Higher wealth spurs additional consumption spending. While estimates vary, IHS Markit analysis indicates that an average home-equity wealth gain of $15,000 should lead to an additional $750 in consumption spending per household over the next couple years, or about $56 billion of additional spending summed up across all homeowners.
Consumer spending is more likely to experience a ‘wealth effect’ from increases in wealth that are viewed as more ‘permanent.’ For this reason, the effect on consumption may be stronger for home equity wealth than for stock equities because families view gains in home equity wealth as more “permanent”, whereas gains (or losses) in stock market wealth may be seen as more “transitory.” For example, since 1970 home-equity wealth has been one-third less variable than corporate equity values, measured quarterly.
Because of the effect home-equity wealth has on consumption spending, these gains in wealth will support further economic growth this year and next.
 Macroeconomic Adviser by IHS Markit has estimated a long-run marginal propensity to consume from an increase in wealth of about 5 percent, implying a $15,000 increase in wealth will lead to a $750 increase in consumption spending per homeowner over time. The American Community Survey reported about 75 million homeowners during 2016, implying about $56 billion in aggregate spending.
 From the first quarter of 1970 to the third quarter of 2017, the market value of corporate equities had gained an average 2.2 percent per quarter with a standard deviation of 9.6 percent. In comparison, aggregate home equity had grown 1.8 percent per quarter with a standard deviation of 2.9 percent, one-third less variable than stock market gains. (Source: Federal Reserve Board, Financial Accounts of the United States, Statistical Release Z.1, series LM153064105 and FL155035065.)
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