Editor’s Note: Benefiting from The Wealth Effect

Theres something special about spring. Even as the days
continue to be cold and wet, we see more light, more life. We see it in the buds on the trees and the occasional burst of a flowering camellia. And then there are those For Sale signs that pop up in yards across the community like mushrooms after a rain. The signs may be ugly but they are a heartening reminder that our economy is getting stronger. Home prices are climbing and those increases are spurring homebuilders to put up new dwellings, a critical ingredient in any strong recovery. Seattle economist Dick Conway estimates the Puget Sound region built 60,000 fewer housing units in the past five years than it would have if not for the recession, so there is a lot of pent-up demand for homes. Conway predicts housing permits will climb by 13 percent this year, compared to a 2.4 percent increase in 2013.

More construction means more jobs for builders, architects, real estate agents and bankers. It means more sales of building materials, furniture, lamps and landscaping services. Neil Kelly, a Portland-based company that claims to be the largest remodeler in the Northwest, says its revenues have climbed 74 percent during the past year.

Rising home prices also stimulate the economy through what is called the wealth effect. You might dismiss it as a variation of trickle-down economics, since the wealthy derive the most benefit, but economic research suggests that for every dollar that our homes increase in value, we tend to spend about 3 to 6 cents more. Across the country, consumer assets have climbed by $8 trillion in the past year thanks to rising stock and housing prices, according to Ken Goldstein, an economist at the Conference Board. In the Puget Sound region, according to Zillow, the cumulative value of all homes, condos and co-ops will reach about $450 billion by the end of this year, up about $90 billion since 2011. The wealth effect would putatively add $2.7 billion to $5.4 billion to the economy between 2011 and 2014. Add to that the pumped-up 401(k)s, thanks to a more than 200 percent increase from the stock market since the bottom in 2007, and youre starting to talk about real money.

Weve probably benefited from the wealth effect during the past two years, but increased confidence in the recovery could drive spending even higher this year.

For an economy to run on all engines, however, we need that wealth to spread across a broader proportion of the population. Long term, that scenario requires better education and retraining programs for the unemployed and underemployed.

But we need short-term measures, too. While we dont want to discourage business investment or eliminate jobs, a modest increase in minimum wages could help spread the wealth and build broader support for the economy as this promising spring turns to summer.