Many people (although hopefully not too many readers of these blog posts) can be forgiven for wishing journalists and commentators would simply shut up for a while about the trends in the housing and mortgage markets and concentrate on more important things like reducing unemployment and improving healthcare.

However, and whether we like it or not, the focus on the housing market needs to continue because it has direct links to many other industries and house prices directly affect consumer spending. Simply put, if people know that their house is increasing in value, they will tend to spend more money (and vice versa). In economic jargon, this is referred to as the Wealth Effect and it is very influential. The economic policy models of the Fed Reserve assume that a person whose house appreciates by $100,000 will increase his spending by the same proportion as a person who receives an extra $100,000 in stocks, shares and regular income.

Declining house prices also limit a banks willingness to lend money - not just for houses but also for cars, business start ups, holidays and general investment. Far too many people who should have known better lost sight of these forces.

Colin Murphy
Torcana.com

Tags: Consumer Spending, House prices, Investment, Torcana, Wealth Effect

This entry was posted on Wednesday, July 15th, 2009 at 9:50 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.