Excess Liquidity Finds a Home

U.S. home prices appear likely to continue to rise as the Federal Reserve injects more liquidity into the system. Given housing’s unique characteristics, this will have positive effects for consumption and growth.

March 13, 2013   |    By Scott Minerd

Global CIO Commentary by Scott Minerd

“The asset category which is best positioned to benefit from the Federal Reserve’s ongoing accommodation appears to be the $18 trillion U.S. housing market. Part of the appeal for the Fed in a run-up in housing is that real estate can be levered up to five times, and is not marked-to-market, so long as prices are appreciating. I would not be surprised to see housing in certain states, such as California, enjoy price appreciation of 10-15% per annum for the next four years. If a home owner is levered, with only 20% down, and the asset appreciates 50%, that equates to a return of approximately 250% on the investment. Furthermore, the wealth effect is much more profound from housing than financial assets. More people own homes than stocks, making it a more pervasive asset class, and people tend to view increasing home values as more permanent than gains in their stock positions.”

Rising Home Prices Will Lift Consumption

U.S. home prices rose 6.8% year-over-year in December, the fastest 12-month growth since July 2006. Historically, home price appreciation has led to increases in real household consumption via the wealth effect. Homeowners tend to spend more when their net worth increases. A recent study by the Federal Reserve estimated that the wealth effect from rising home prices has four times the effect of the change in wealth effect from rising financial asset prices. As the housing market continues to recover, consumption can be expected to follow accordingly.

U.S. S&P/CS HOME PRICE VS. REAL PERSONAL CONSUMPTION EXPENDITURE

Source: Bloomberg, Guggenheim Investments. U.S. Real Personal Consumption Expenditure data as of 12/31/2012. Remaining data as of 1/31/2013.

Economic Data Releases

Strong Employment Numbers Across the Board

Industrial Production Disappoints in Europe and China

Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2014, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.



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