The balance sheets of U.S. households look vastly different today than five years ago. Rising home prices and falling stock prices have greatly changed the composition of household assets since 2000. This shift has significant implications for commercial property markets as well as housing.

In early 2000, the stock market was soaring while housing markets were beginning to recover from a recession in the early 1990s, especially in California. These conditions set the stage for a dramatic reversal when the Internet stock bubble burst in 2000. Stock prices began a dramatic decline still affecting most stocks on Nasdaq. Hence, a massive amount of capital moved out of stocks and bonds into real estate, and is only now starting to show signs of abating.

Meteoric rise in home equity

In 2000, there were 104.7 million U.S. households; the value of real estate they owned was $19.1 trillion, averaging $107,583 per household. About 51% of all households owned stocks, either directly or in mutual funds; the average value of their stock holdings was $226,611. Some 66% of all households were homeowners, and the average market value of their homes was $162,512, reports the Federal Reserve. Households owned $10.6 trillion in stocks and $12.5 trillion in real estate. Combined, both types of assets accounted for 46.1% of their total assets of $49.4 trillion.

By 2005, the number of households had risen by 8.5% to 113.6 million, and the percentage of households owning stocks rose to 56.9%. But the average stock holdings among those households had fallen 31% to $156,463, down $14,030 per year. Homeowners accounted for 69% of all households. The average market value of their homes soared 50% to $243,900, an increase of $16,231 per year. Consequently, real estate — 90% consisting of owner-occupied homes — rose from 25% of total assets held by households and non-profits in 2000 to 33.3% in 2005; whereas stocks had fallen from 21.5% to 16.3%.

In the same five years that the average homeowners' gross equity in housing was rising by 50%, or $16,231 per year, average household personal disposable income increased by only 15.8%, or $2,169 per year, to $79,554. Homeowners' net equity in their homes soared by 50% too, or $9,265 per year. Most homeowners counted such increases in net equity in their homes as true savings, although the nation's official income accounts do not. Thus, homeowners were gaining 4.27 times as much additional wealth each year from rising home prices as they were from increases in their personal disposable incomes. Unfortunately, those homeowners who also owned stocks were losing $14,030 per year from stock market declines.

Ripple effects of new prosperity

The big increases in personal wealth resulting from rising home prices surely helped support continued high levels of consumer spending. Mortgages against homes — including a slew refinancings during periods of record-low interest rates — provided households with cash to pay for education, vacations, home furnishings, cars, and remodeling. Total mortgages — including home-equity loans — rose at about the same rate as home prices, since the fraction of home values covered by such financing stayed constant at 42.9% from 2000 to 2005.

It is not possible to determine how much of that increase in mortgage lending — which averaged $6,966 per home-owning household per year — was used to pay for non-housing consumption. But it's clear that consumers would have had vastly less resources with which to spend and keep the American economy going. Increased prosperity in America during the past few years was heavily underwritten by rising home prices.

That wealth benefitted other property sectors. Retailers owe a huge part of their recent success to the consumer spending fueled by rising home prices nationwide. That includes restaurants, theaters, and other outlets that depend on household spending. Even offices and hotels gained from the jobs supported by increases in consumer spending.

But what will happen to consumer spending if housing prices stop rising, or if borrowing against housing becomes harder because of rising interest rates? A leveling off of housing prices, or a decline, would surely slow down increases in consumer spending and hamper U.S. economic growth. That would adversely affect all types of real estate.

While the U.S. housing market is not a bubble about to burst, there are signs of a slowdown in housing price gains. It seems unlikely that the huge increases in household wealth from rising home prices since 2000 and before can continue to sustain the exuberant consumer spending we have recently enjoyed.

Anthony Downs is a senior fellow at the Brookings Institution and a visiting fellow at the Public Policy Institute of California. He can be reached at anthonydowns@csi.com.