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Rising home prices could push consumer spending, borrowing activity high

Aug 07, 2013 Quinn Thomas

In the past couple of months, consumers have seen personal financial situations improve as a result of numerous occurrences, such as rising home prices.

As household wealth increases, Americans might begin to spend more, which could also result in more borrowing activity. For this reason, short term lending demand may rise, so financial institutions offering these types of loans should prepare for an influx of applications.

Home prices surge in the first quarter
The first three months of 2013 proved to be strong for house prices, as the CoreLogic Case-Shiller Indexes revealed more than three-quarters of metropolitan areas saw increases. Overall, prices jumped 10.2 percent, marking the first double-digit gain since the peak of the housing bubble prior to the financial crisis.

In the coming years, price appreciation is projected to slow, with a 5.6 percent gain between the first quarter of 2014 and the same three month period in 2015. The reason for this is that more inventory is expected to hit the market, which will prevent excessive bidding wars that push selling prices higher.

"Record levels of affordability, a slowly improving job market, and very small inventories of new and existing homes for sale will continue to drive U.S. home price appreciation during the summer," said David Stiff, chief economist for CoreLogic Case-Shiller. "Although a small number of metropolitan areas show year-over-year declines, it is likely that home prices in these cities will turn positive by the end of the year."

Strengthening employment situation also providing consumers a boost
Coupled with rising home prices, the improving jobs market could also lead to increased borrowing activity in the near future. The economy added 200,000 positions in July, up from 198,000 in the previous month, according to the ADP National Employment Situation.

Small businesses continued to lead the way with 82,000 new jobs, followed closely by medium and large businesses at 60,000 and 57,000 positions, respectively. It wasn't all good though, as the manufacturing industry lost 5,000 jobs. However, all other industries posted gains.

"Job growth remains remarkably stable," said Mark Zandi, chief economist at Moody's Analytics. "Businesses are adding to payrolls in most industries and across all company sizes. The job market has admirably weathered the fiscal headwinds, tax increases and government spending cuts. This bodes well for the next year when those headwinds are set to fade."

Favorable consumer conditions could boost borrowing activity
In the years following the financial crisis, Americans held back on spending and borrowing. One of the main reasons for this action was the fact that home prices were slashed greatly, bringing down household wealth. But now that values are back on the rise, this trend could be reversed, potentially leading to more borrower demand.

Of course, with higher activity comes greater risk of fraud. That being said, short term lenders need to be sure to have strict ID verification procedures in place to ensure people applying for a loan are who they say they are.