Sharp Rise In Owners’ Equity Can Help Economy, But Watch Out For Trend Reversal

In 4Q20, the market value of US household real estate rose to $32 trillion, up $803.3 billion quarter-over-quarter. This metric has come a long way from the low of $17.9 trillion in 1Q12. The 4Q20 total made up 149.1 percent of nominal GDP. This is lower than the 157.7 percent reached in 2Q20, but that was mainly because of the sharp contraction in the economy, as nominal GDP shrank to $19.5 trillion, versus $21.5 trillion in 4Q20.

The overall trend has persisted higher since 2Q12 (Chart 3). Of note, the red bars were much higher in 2005 and 2006 as the bubble back then was getting ready to pop. This gives hope for housing optimists that the metric has room to run before it falls under its own weight.

The rise in market value of real estate has led to a rise in owners’ equity. From 45.8 percent in 1Q12 to 65.9 percent in 4Q20, the red line in Chart 4 has persisted higher. The 4Q20 total is the highest since 3Q90.

On an absolute basis, owners’ equity was $21.1 trillion in 4Q20 – a new record and up $654.4 billion q/q. That is a lot of equity built up in just one quarter. This can help the economy, as home equity loans allow homeowners to borrow against the equity in their home. This is what the Fed intended.

This at the same time can also prove to be a mirage once home prices begin to go the other way, as we saw it happen after the last housing bubble burst. It is too hard to say if we are at that point yet. As seen earlier, metrics are elevated but off the bubble highs. So, what is crazy can always get crazier. But this at the same time is not a time to get too sanguine about what is transpiring in US housing – particularly on the price front. The sector is as susceptible as any to the rules of gravity.

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