Despite the 150% rise of the stock market from its lowest point in 2009 - and surpassing its pre-crisis high - the housing market has far to go to catch up its last peak.
Homes constitute an overwhelming part of the American household's net worth. While wealthy Americans have significant allocation to stocks and bonds, most Americans are under exposed to stocks and haven't benefited much from its rise.
Given that home prices are still over 25% below their peak on average, and many Americans have lost their homes, we still must repair the damages to the economy incurred during the crisis. Many Americans have no equity in their homes, and over 25% of borrowers have negative equity in their houses placing them into net negative worth.
Despite the GDP growth gradually crawling back toward the 2 to 2.5% range, economic stimulus has not been sufficient to propel the economy to cover the hole left by the great
recession. Even though corporations and banks have repaired their balance sheets and are enjoying record profits, households' balance sheets have been weak and will remain so until housing prices fully recover and unemployment gets back below 7%.
Structurally the secret has been low interest rates and inexpensive money to those with access. This has had a disproportionate impact on stocks over housing. Investors can easily pledge stocks and bonds to secure loans from their brokers to leverage them and benefit from a market rise. Margin interest rates can be as low as 1% but are typically near the prime (3.25%). By contrast refinancing has not been available to many homeowners because of their negative equity, unemployment, or damaged credit records situation.
Housing is critical to a full economic recovery but will take time to normalize back to its historical norm. Hence, it naturally lags stocks yet it has the right momentum. Nevertheless, without significant rise in household income, it will be naturally capped by affordability and much stricter lending criteria.
Ron D'Vari is chief executive and co-founder of NewOak Capital LLC.This commentary originally appeared on the company's website.
