Home prices and spending

Many economists point to problems in the housing market as a big reason for our economic sluggishness. What’s the connection? N.C. State University economist Mike Walden explains.

“Well … I think most people know we went through a housing boom from roughly 1997 to 2007, where housing prices went up. Now for homeowners, effectively what that meant was the equity in their homes went up — that is, the part of the home that they own. So, their wealth went up. And … there developed, over time, ways for people to have that wealth without selling their homes — home equity loans being a good example.

“And homeowners did that over that time period. In fact, it’s been estimated that the increase … in home prices allowed homeowners collectively to borrow and then spend $800 billion dollars a year from their home equity. That’s close to 10 percent of all consumer spending.

“Now the problem, of course, is that we’ve had a housing turnaround. We’ve had housing prices go down. In fact, nationwide, homeowners have lost $8 trillion dollars in home equity. That $800 billion dollars is no longer there being spent by homeowners. And so that, I think, has had a profound effect on the economy. We’re simply not getting the kind of spending that we had prior to the housing buzz.

“And I think that’s a big reason why the economy continues to struggle.”