Perhaps unsurprisingly, there are correlations between how much Americans’ homes are worth, their overall wealth, and how they spend their money, and these links go a long way in explaining why a crisis in the housing market can so quickly spiral out of control. A sudden dip in home values can leave homeowners feeling poorer and more economically fragile, causing them to reduce their spending in many different ways. When that happens en masse in a country where consumer spending represents nearly 70 percent of GDP, it can be catastrophic for the national economy.
But as straightforward as this dynamic may sound, economists have yet to fully nail down how exactly a fall in home values affects household spending. In order to explore that, the economists Greg Kaplan, Kurt Mitman, and Giovanni L. Violante looked closely at spending on nondurable goods—things that are consumed immediately or within three years or less, such as food and clothing—during and after the housing-market collapse. In a recent paper, they say that they found that the 30 percent decline in housing values that occurred during the Great Recession can be associated with a 6.1 percent decline in spending and a 3.1 percent decline in consumption during the 2007 to 2011 period. They also find that the decline in overall expenditures is partially the result of the fact that some stores reduced their prices in response to decreased demand during that time.
