Tuesday, March 25, 2008

Is the Wealth Effect Oversold?

One reason economists are worried about falling housing prices is the wealth effect: that changes in the value of what households own affect their consumption spending. As house prices drop, household wealth falls, pulling consumption down.
Bill Wheaton, professor at the Massachusetts Institute of Technology, thinks the wealth effect is overdone. Certainly the loss of intermediate demand and employment from the 56% drop in homebuilding is not overdone.

No comments: