In a new note to clients, he projects home price appreciation between 5 and 10 percent for the year ahead. He further explains why this is good news for households as well as the extent to which the wealth effect magnifies consumer spending:
…price appreciation enables households to refinance debt, thereby reducing interest expenses, as well as tap into home equity via lines of credit or cash-out refinancing… The prevailing estimates of the wealth effect on consumption from home price appreciation is generally believed to be around 0.05 to 0.10. In other words, a one dollar increase in home values lifts consumer spending by five to ten cents.
Based on projections for home price appreciation, Riccadonna indicates consumer spending should receive a boost between $43 and $172 billion, which “is substantial considering that real consumer spending increased by $178 billion over the past four quarters.”
"Through its direct and indirect effects, the housing sector alone could potentially contribute as much as 2% to real GDP growth this year," write Riccadonna.