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Home equity is rising, but don’t get too excited about it

The amount of the equity people have in their homes hit $10 trillion in the fourth quarter, the highest level since 2007. It's a tidbit of data from the Federal Reserve that generated lots of excitement this week about how the comeback will lift consumer spending.

Not so fast, says Amir Sufi, a finance professor at the University of Chicago Booth School of Business. “This is not your 2002-to-2006 housing boom,” he said.

A rise in equity is closely tied to a rise in home prices. And home prices have been climbing in recent years because investors have been snapping up foreclosures in cities hard hit by the housing meltdown. These investors tend to be wealthier than the average household, so a rise in the values of the homes they own will probably not affect their spending, Sufi said.

By contrast, the homeowners who amassed equity in their homes during the boom – some of whom also lost their homes during the bust – tended to be the borrowers with lower credit scores and lower incomes. They’re the ones who tapped into the equity and upped their spending.

They often used the cash-out refinancing to take money out of their home. This chart plots how cash-out refinancing closely tracked house price growth.

Atif Mian, an economics professor at Princeton University who analyzed the data with Sufi, said that the level of cash-out transactions from 2002 to 2006 is unlike anything we’ve seen before or since, and it contributed significantly to consumer spending during those years.

“The point is that the increase we’re seeing in house prices will have some impact on household spending, but not the same level of impact as it did early on,” said Mian, who is also co-authoring a book with Sufi called "House of Debt," which is due out in May.