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Homeowners in Rising Markets are Taking on More Debt, but Still Retain Most of the Appreciated Value

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For more than a decade, the federal government has acted
to encourage homeownership at all income levels through
special lending, assistance, and tax measures. Recent
initiatives include the 2004 American Dream Act and
federal regulations aimed at boosting the percentages of
Fannie Mae and Freddie Mac lending directed to
underserved borrowers and communities. But how do rising
housing markets affect the household economy? Do
households actually accumulate wealth when their homes go
up in value, or do they tend to spend the increased value
by taking on additional debt?

The Impact of House Price Appreciation on Portfolio
Composition and Savings, recently published by the U.S.
Department of Housing and Urban Development, sheds light
on these questions. The full text of the study is
available as a free download at
https://www.huduser.gov/portal/publications/affhsg/housepriceimpact.html

The study finds that rising home values do encourage
homeowners to spend more. For each dollar a house
increases in value, the household takes on up to 15 cents
more debt, mostly to pay for consumer goods such as cars
or other durables.  The study also confirms earlier
research findings that homeowners are more likely to take
money out of their housing assets to spend on consumer
goods than from their stock market holdings.

Yet the study shows that homeowners typically do retain
most - at least 80 percent - of their home's appreciation
in value. This pattern of spending and investment is
similar for households with high, moderate, and low
incomes.

Because housing market values can fall, this pattern does
not ensure that homeownership will enable every family to
accumulate assets. To the extent that real house prices
tend to rise over time, however, the study concludes that
"[T]he tendency of homeowners to save most of their housing
capital gains is consistent with the view that
homeownership helps them accumulate wealth, and as such,
lends support to recent policy initiatives designed to
expand access to homeownership."

The study bases its findings on an analysis of household
saving and investment patterns using 1983-2001 data from
the Survey of Consumer Finances and the National
Longitudinal Survey of Youth.

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