Housing wealth and spending

The decline in home prices during the recession has had widespread impacts on the economy, and, as N.C. State University economist Mike Walden explains, those effects have been different for different kinds of households.

“Let me explain a little more of what we’re talking about here. And what we’re talking about here is, if you own a house and you see the value of your house go down, that’s actually going to affect not only your wealth, it’s going to affect how much money you spend. You’re going to feel poorer, and you’re going to spend less. In fact, for every dollar decrease in the value of your home, research shows that that owner reduces their spending by between 5 and 8 cents. So, that’s a very, very important aspect of changes in housing wealth.

“But this impact on household spending does vary by the type of household. It is larger for very young homeowners and very old homeowners, and it’s less large — smaller, I should say — for middle-age homeowners.

“Also it’s much higher for poorer households than it is for higher income households. And then lastly, and I think this is a very important point with respect to what’s happened in our economy recently, the research shows that this impact of a reduction in housing values on the homeowner’s spending is larger when their house is a bigger part of their overall wealth. And that, indeed, was the case for housing prior to the recession. We went into this recession with very high housing wealth, and housing wealth was a very big part of total wealth. We had a crash in the housing market, and we’ve seen the effects in terms of a massive reduction in consumer spending.”

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