If rising home prices helped the economy bounce back from the dot-com stock market crash by allowing homeowners to convert their growing equity into disposable cash, few are counting on such relief today. A new study suggests that falling home prices will only make the current economic downturn worse, by significantly reining in consumer spending.

The study, by economists at the USC Lusk Center for Real Estate and the UCLA Ziman Center for Real Estate, found that between 1989 and 2001, changes in housing wealth had about three times the impact on consumer spending as other sources of wealth, such as stock holdings.

The study concluded that a 10 percent decline in housing wealth may reduce consumer spending by $105 billion — the equivalent of a 1 percent reduction in real gross domestic product growth.

During the housing boom, many homeowners used their homes like ATM machines, converting paper gains in equity created by rising home prices into cash to finance purchases of cars, appliances, and other goods and services that might otherwise have been beyond their means.

But it’s hard to say how prevalent the practice was, because home equity can be more difficult to tap than other forms of financial wealth. In order to realize paper gains created by rising home prices, homeowners must either sell their homes or take out a home equity or cash-out refinance loan.

The study, "Housing Wealth, Financial Wealth and Consumption: New Evidence from Micro Data," attempts to more precisely quantify the link between rising and falling home prices and consumer spending.

Rising home prices helped offset the impact on consumer spending of the dot-com stock market collapse, which "destroyed more than $8 trillion in paper wealth and was arguably the cause of the 2001 recession," the paper notes.

What’s your opinion? Leave your comments below or send a letter to the editor.

Show Comments Hide Comments
Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
By submitting your email address, you agree to receive marketing emails from Inman.
Success!
Thank you for subscribing to Morning Headlines.
Back to top
Only 3 days left to register for Inman Connect Las Vegas before prices go up! Don't miss the premier event for real estate pros.Register Now ×
Limited Time Offer: Get 1 year of Inman Select for $199SUBSCRIBE×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription
×