July 19, 2010
The housing wealth effect — the idea that people’s consumption is determined in part by their housing wealth — is one of the oldest concepts in economics. Apparently the NYT still has not heard about it.
An article about the consumption patterns of the wealthy made no mention at all of their housing wealth. The economy lost around $6 trillion in housing wealth with the collapse of the bubble, a disproportionate share of this wealth was held by the wealthy. It would be very surprising if their consumption did not decline in response to this loss of wealth. (The housing wealth effect is usually estimated at 5-7 cents of additional consumption each year for every additional dollar of housing wealth.)
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