The Housing Crisis and its Effects on Aggregate Consumption

In this short post, I review the data on the rise and fall in residential housing wealth and try to quantify its effect on aggregate consumption. This is an important question in gauging the depth and length of the recession that lies ahead.
The Facts
Prior to the current situation, the U.S. economy witnessed an unprecedented boom in home values. Between June 1996 and June 2006, the Case-Shiller house price index for the 10 largest metropolitan areas in the U.S. almost tripled from 77.8 to 226.3. This amounts to a whopping growth rate for home values of 17% per year. Supporting this picture, the Flow of Funds data show that residential real estate wealth increased from $10 trillion to $24 trillion over the same period. Averaged over the two-thirds of households that are home-owners (68 million households), that amounts to an increase of $200,000 in housing wealth.

4 Responses to "The Housing Crisis and its Effects on Aggregate Consumption"

  1. Krish   October 19, 2008 at 9:37 pm

    very good article. bit technical and in case author is reading this comment then I have a quick question. when will home prices stabilize and when will it start going up ?I know it is a difficult and vague question but was wondering ….

  2. Guest   October 20, 2008 at 4:29 pm

    How on earth are you able to pull a straight line through that cloud of data??? With one look on the hugely distributed cloud it should be more then obvious that there is no straight line. There is no straight line. So please do not try to fit one in. The could is probably trying to tell you something. I am not studying the subject in depth so i can’t help you there, but please don’t waste your energy and intelligence.kind regards,erikwim duringthe netherlands

    • Joe Wheeler   October 21, 2008 at 3:11 am

      That “straight line” is what the measure is, a linear regression analysis. You look at the slope and the values of the X and Y axes.

  3. dan   October 26, 2008 at 2:46 pm

    Good article. However, why do you say consumption growth is falling significatly recently, when your chart (the red bars) seems to suggest that consumption growth has been rising near term, and albeit lower levels than past is more like “stable” — in particular, in contrast to the obvious collapse in housing wealth?