Impacts of losing real-estate wealth

Most economists agree that the decline in real-estate wealth was one big reason the recent recession was so bad. N.C. State University economist Mike Walden explains why this was so important.

“Well, first of all, the real estate sector is gigantic. It accounts for about 12 percent of the economy when you include all of the factors of the economy related to real estate. Secondly, it’s a big employer, and we still have very high unemployment among, for example, construction workers. And thirdly, it has a big impact on consumer spending. If consumers are wealthier, they’re going to spend more. If consumers are not as wealthy they’re going to spend less.

“Now, recent research has shown that the hits that the average consumers take in real estate wealth has actually been more and had a more detrimental effect on consumer spending than, for example, the hits when your stocks go down. And that’s because of what real estate wealth does to lower- and middle-income households. For lower- and middle-income households, real estate is really their prime source of wealth. And so when we’ve had a crash in the real estate market like we’ve had, that really hits low- and middle-income households hard. And because those households tend to spend more of their income, it really hits their spending hard. And, of course, this recession has been a recession where consumer spending took a big drop, and it’s not recovered very much.

“So, I think all this is a way of saying, again, that the unique feature of this recession has been the decline in real-estate wealth. Its impacts have been very, very broad and deep.”