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Rising household wealth could boost borrowing activity

Aug 10, 2013 Dave King

In the aftermath of the financial crisis, Americans across the country lost a tremendous amount of wealth, which may have led to decreased spending and borrowing activity. But now that multiple factors are pushing household wealth, demand at banks and short term lenders could begin to rise.

Significant home value appreciation aiding consumers
One of the biggest factors leading to improved wealth among Americans is consistent increases in home values. According to the latest Zillow Home Price Expectations Survey, more than 100 forecasters expect the Home Value Index to end the year up by an average of 6.7 percent. This is an improvement from the previous projection, which said prices would rise by 5.4 percent this year.

"Short term expectations for home value appreciation through the end of this year are consistent with a nationwide housing market recovery that is both strengthening and widening, but still coping with high levels of negative equity, high demand and low inventory," said Zillow Senior Economist Dr. Svenja Gudell. "Combined, these factors will continue putting upward pressure on home values for the next few months."

Looking forward, home value appreciation is expected to slow but remain at a good pace. Between 2014 and 2017, panelists said they expect a 4.4 percent increase in 2014, followed by 3.6, 3.5 and 3.4 percent jumps in 2015, 2016 and 2017, respectively.

Consumer spending already showing improvement
Americans are already beginning to reap the benefits of higher home prices and other factors driving household wealth, as consumer spending increased 0.5 percent in June, according to the Bureau of Economic Analysis. This was in line with expectations, as economists surveyed by Bloomberg called for a 0.5 percent gain.

"Consumers continue to spend but they're effectively treading water," Omar Sharif, U.S. economist at RBS Securities, told Bloomberg. "There's not a lot of momentum but they're holding their own for the most part."

In addition to home price increases, rising stock values and an improved jobs market have helped boost consumer spending and canceled out the effects of the payroll tax bump in the beginning of the year.

Federal Reserve policy makers recently said the economy is expected to see a pick up in growth from its recent pace, and the unemployment rate should fall, which may further help consumer spending.

Borrowing activity could pick up with household wealth improving
As consumers continue to experience improved wealth, spending and borrowing activity could follow suit. That being said, financial institutions offering short term lending may want to prepare for an influx of applications.

With an increased number of customers, lenders are handed the responsibility of making sure that borrowers aren't fraudulently taking out loans. When there is a lot of demand, criminals may believe it will be easier to get away with fraud as lenders are so busy. For this reason, it is important to have strong ID verification procedures in place to ensure that no borrower takes out a loan with a false identity.