For quite some time, I have been reading about the “wealth effect.” Perhaps you have read about it, as well. Simply put, when homeowners’ home values jump as much as they have the last several years, the owners get a questionable, inflated sense of greater wealth. With this feeling that they are more affluent, they tend to spend more on other things. Of course in most cases, the gain in net worth is just a gain on paper. No financial boost is realized unless the property is sold. In fact, the reality is that a huge gain in property values may result in a slight loss of cash flow . . . not an improvement. Reason being . . . taxes. If the tax value of a home jumps substantially, the market value eventually is reflected in an increase in property taxes . Thus, a slight decline in disposable income, not a gain.
This poses the question: Will Americans cut back on spending because of the exact opposite reasoning when values decline? I feel certain they will, and the FED is counting on it. Back in 1976, I held open house almost every weekend in Shady Hollow, Lost Creek, or Tanglewood Forest . I could actually see a drop in real estate traffic on days following major losses in the Dow Jones Index. Slipping home values seems likely to trigger much the same emotion.
All of this brings a West Texas term to mind: “real estate poor” . . . or “land poor.” Back home, many families were extremely wealthy on paper with thousands of acres of ranch land, but still had trouble making ends meet. Those of us who grew up in the farm and ranch environment call that land poor. Which leads me to another favorite saying back home: For every successful rancher . . . there is a wife who teaches school in town.
To get back to the wealth effect, I think economists would be quick to agree that the wealth effect, coming out of Covid, exacerbated the inflation we were experiencing. If dipping real estate values, cause homeowners to reverse their free-wheeling spending habits, one would expect that the Federal Reserve’s interest rate hikes should begin to work soon.
Jeff Stewart, CCIM
Stanberry REALTORS / jstewart@stanberry.com
PLEASE READ: Texas law requires all real estate licensees provide the Information About Brokerage Services (IABS)
to prospective buyers, tenants, sellers and landlords. Please see the link above.