When Home Prices Fall Does Consumption Take A Hit?

I finally found an in depth study that details the effects of falling real estate prices on consumer spending. I admit the article is lengthy but the conclusion is well worth the read.

Article Abstract & Introduction (Via SSRN)

Fluctuations in the stock market and in house values over the course of recent years have led to renewed macroeconomic policy debate as regards the effects of financial and housing wealth in the determination of consumer spending.This research assembles a unique matched sample of household data from the Survey of Consumer Finance and the Consumer Expenditure Survey to estimate the consumption effects of financial and a housing wealth.

“Research findings suggest the possibility of sizable reverse wealth effects. For example, a 10 percent decline in housing wealth from 2005 levels translates into a 1 percentage point decline in real GDP growth, a sizable reduction relative to the approximate 4 percent real GDP growth evidenced in recent years.”

Article Background (Via SSRN)

Finance and the Consumer Expenditure Survey to estimate the consumption effects associated with real estate and financial wealth. The highly-detailed micro data enable us to shed new light on household consumption behavior in several important ways. Specifically, we assess household responses among different categories of consumption spending and to various components of financial and real estate wealth. Further, the research evaluates variability in consumption spending to changes in the market value of household asset holdings, as is customary in the empirical literature, and to changes in wealth net of debt, as is consistent with theory. The analysis also examines household responses over time and in response to volatility and trend deviations in the underlying wealth measures, so as to assess in the robustness of the estimated elasticities to the marked fluctuations in stock market and real estate valuations evidenced over the 1989 – 2001 period. Additional estimates are presented, including those pertaining to the robustness of wealth estimates across households grouped by age and by credit constraint in consumer debt markets.

Click here to read about declining housing prices and their effects on consumer spending

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02. November 2008 by Miguel Barbosa
Categories: Curated Readings, Finance & Investing | Leave a comment

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