25 June 2009

Housing Wealth Effect Documented

Why did consumers run up so much debt before the Financial Crisis?

They were spending unrealized gains in their home values, and didn't have access to funds in other ways due to poor credit and nearly maxed out credit cards. The data illustrating this link (about a quarter of new spending per dollar of increased home value) is impressive, despiite the practical difficulties of showing these kinds of relationships.

Economists call spending based on perceived increased lifetime wealth (such as a rise on the value of assets owned) a "wealth effect."

1 comment:

Dave Barnes said...

There is some great Freudian analysis here: "Why did consumers run up so much dead"