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Most Americans largest asset is their home
When our homes value goes up, we feel wealthier and spend more
When our homes value goes down, we feel poorer and spend less
This is a phenomenon called the wealth effect.
Positive wealth effects cause increase in consumer spending .
Negative wealth effects cause decreases in consumer spending.
With home sales falling, home prices decreasing, and several other headwinds working against the housing market, a negative wealth effect is coming.
Home buyers are backing out of deals at the highest rate since the pandemic began
Existing home sales are down for the 6th consecutive month – down nearly 26% in that time
Homebuilder sentiment is down 8 months in a row
These are all leading indicators telling us that continued home price decline is likely
Home price declines will lead to reduction in the amount of equity we have in our homes
Which will in turn lead to a decrease in access to the easy credit that equity provides
Less HELOCS, less cash out refinances, fewer construction loans, fewer home equity loans
All of this will lead to decreases in consumer spending and an overall decrease in the average homeowners wealth
All of which will amplify the intensity of any coming economic downturn
To end on a more positive note:
Recessions happen and it’s good to be prepared for them
But over the long term things are generally more positive than negative
And over the 5 year period following an economic crisis recoveries are extremely resilient
The key is to avoid panic by being prepared
The above rant is accompanied by the usual ensemble of articles and videos on my website that can help you prepare for what’s to come.
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