When the housing market fell apart seven years ago, thousands of Sacramento households were made poorer by plunging home prices that left them owing far more than their homes were worth.
The local economy suffered as families, watching their net worth erode, stopped spending.
Today – with strong demand from buyers, record low interest rates and a scant supply of homes for sale – prices are rising across the region, and many of those residents are regaining equity in their homes. At the same time, they're starting to spend again.
"When I see my major investments appreciate, it gives me a good feeling. It makes me feel peachy," said Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University in Orange County.
This "positive wealth effect" gives consumers a "green light to spend a little bit more," he said.
A report this week by real estate data firm CoreLogic said more than 22,500 homeowners in the four-county region with underwater mortgages rose above the surface in the last few months of 2012. While there were still 152,000 households underwater at the end of last year, the reduction in so-called negative equity was 10 times the national average, the Irvine-based data firm reported.
The improvement "directly correlates with home prices, and home prices in Sacramento are going up at a faster clip than the U.S.," said Sam Khater, CoreLogic's deputy chief economist.
With the spring buying season under way, the trend continues. It is making consumers feel better about their economic prospects and more willing to spend on home improvements, cars and other major purchases, economists and business leaders say.
The Anderson Center's latest report on consumer optimism – the California Composite Index of Consumer Sentiment – said those good feelings reached a six-year high this year, with more people feeling upbeat than pessimistic for the first time since early 2007.
Higher home prices, improvements in the job market and a stock market rebound are major factors and have offset the effects of higher payroll taxes and gas prices, the report said.
Consumer spending tends to tick up about six months after home prices start to rise, economists said. A rule of thumb is that homeowners spend about a nickel of every dollar that their homes increase in value, they said.
Area businesses say they have started to feel the effects of the improving economy and rising home prices in the last few months.
"Consumer confidence is coming back. People are feeling OK about spending money," said Steve Linton, manager of Green Acres Nursery & Supply in Folsom.
Landscaping contractors are getting busy again after years of "deathly slow" business, Linton said. They are buying thousands of dollars worth of plants and materials and lining up jobs into summer. Homeowners are once again buying high-end patio furniture and built-in barbecues, he said.
Some of the business is coming from buyers of new homes, which are being built again in significant numbers after a five-year hiatus. Other customers have bought homes that came on the market as short sales or foreclosures. Those distressed properties often have neglected landscaping, Linton said.
"We're seeing a comeback," he said. "It's exciting."
Car dealers, too, say they are seeing sales boosted by rising home values and other factors.
Buyers' attitudes are "positive, or at least more positive," than in recent years, said Rick Niello, president of The Niello Company of high-end car dealerships, including Acura, Audi and BMW.
"The stock market has been in high gear and the recent housing news in our region has been very encouraging," Niello wrote in an email. "I believe these two issues are having a very positive impact on our business."
Unlike the boom years, car buyers aren't taking out home equity loans to purchase new vehicles, dealers said. Buyers are still cautious, putting more money down and buying used vehicles instead of new, they said. But sales are brisk.
"We've had a couple of back-to-back record months," said Katina Rapton, president and general manager of Mel Rapton Honda along the Capital City Freeway in Sacramento.
"People seem a lot more free and just not as tense," she said. "I feel we're starting to see 'want to buy' instead of 'need to buy.' "
Call The Bee's Hudson Sangree, (916) 321-1191.