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Impact of the Housing Crash on Consumption

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Tuesday, 12 March 2013 06:57

Bruce Bartlett has an interesting blog post in the NYT talking about changes in patterns of wealth distribution in recent years. Bartlett points out that the recent rise in the stock market is likely to provide little benefit to most middle income families since they have little, if any, wealth in the stock market. By contrast, the value of the housing stock is still far below its pre-recession level, at $17.7 trillion at the end of 2012 compared to a peak of $22.7 trillion in 2006. Bartlett notes that this is likely to have a large impact on consumption and the economy, citing recent work by Karl Case, John Quigley, and Robert Shiller showing that a $1 decline in housing wealth is associated with a 10 cent drop in annual consumption. 

It is worth noting that the drop in the nominal value of the housing stock understates the impact of the housing crash on consumption. Potential GDP was almost 30 percent higher in 2012 than in 2006. This means that to provide the same spark to the economy as it did in 2006, the value of the housing stock in 2012 would have to be almost $30 trillion in 2012.

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written by urban legend, March 13, 2013 12:30
"This means that to provide the same spark to the economy as it did in 2006, the value of the housing stock in 2012 would have to be almost $30 trillion in 2012."

But that's absolutely the last thing in the world we should wish for, is it not? For that matter, isn't it the last thing in the world we are going to see for many, many years?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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