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Could Higher Home Prices Lead to More Shopping?

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The housing market has made huge strides in the past several months and is now generally viewed as being in full recovery mode after an uncertain start. As such, it’s also likely that consumer spending will tick upward and in turn drive a broader economic recovery that will be beneficial for the whole country.

With housing prices on the rise across the country, it’s believed that consumers will be in a better position to spend more than they did in the years following the recent recession, according to a report from the Washington Post. A study conducted in 2006 found that for every dollar home values rise, consumers tend to spend an additional two cents in the next quarter, so the sizable gains seen in the housing market since November 2011 could be a big economic driver moving forward.

Data from the Federal Housing Finance Agency shows that for the 12-month period ending in November, home prices across the country rose 5.6 percent, the report said. And because similar improvements are expected throughout 2013, it’s believed that the total combined value of the entire housing market could rise by some $963 billion to a total of more than $18.1 trillion.

That, in turn, would mean that consumer spending could tick up as much as $77 billion, the report said. However, there’s also reason for more optimistic expectations than that, because data from the housing market’s downturn shows that spending was disproportionately scaled back compared to national averages largely because owners whose home values slipped to amounts lower than what was owed on mortgages. As such, it might be reasonable to guess that as home prices once again rise, underwater mortgage holders will once again increase their spending back to normal levels and therefore further increase the actual amount of money being spent.

In addition, rising home prices might also encourage borrowers who were previously underwater on their mortgages to begin listing their properties on the market again, which will in turn meet the high buyer demand already created by near-record affordability, thanks largely to record-low interest rates. This is why experts believe the entire housing market is due for a major surge during the next few years, particularly if the Federal Reserve Board continues its quantitative easing to keep rates low.

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  • Dona Collins

    I just read on another site that mortgage rates have just gone up for the 2nd time in a row again. I don’t understand interest rates as well as other finance aspects, but I wonder how long it will be before the mortgage rates are so high people start to think twice about rushing out to buy homes?

    I honestly wonder if I’m living in some sort of alternate reality. I keep reading about how improved the market and economy are, but the people around me don’t seem to have found much new hope yet.

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