Wealth Effect in Housing Diminishing

The erosion of the U.S. syndrome known as the “Wealth Effect” is beginning to show that fall out from the ailing housing market could have a major impact on the overall U.S. economy, according to a new Housing Predictor study. Housing Predictor forecasts more than 250 local housing markets in all 50 states and tracks changes in the market place.

Foreclosures are at all time record highs and are expected to increase with 5 million adjustable rate mortgages resetting in the next three years. The nation’s housing markets are upset in some areas of the nation, while others are

suffering through the misery of a developing economic crisis. Historically housing leads the U.S. economy into recessions. Typically interest rate hikes take the steam out of the market place, slowing the market. In 2001 the Federal Reserve aggressively lowered interest rates to curtail economic damage caused by the stock market bust, which was triggered by the dot com bubble. The cuts helped the nation’s economy return to balance until mortgage lenders came up with new exotic conventional mortgages and opened the market to many mortgage borrowers who would have never qualified for conventional mortgages with subprime loans.

The Fed also triggered record levels of home equity borrowing and a new breed of real estate investors, who were only interested in making fast money in the market place. The conventional wisdom of buying real estate as a long haul investment disappeared in the haste to make a quick profit. Scholars who have studied the problem are now saying that the boom would have probably been only about half it’s size had lenders not offered the new breed of mortgages.

According to a study conducted by Harvard’s Joint Center for Housing Studies, consumer spending habits are similar whether the increase in “Wealth Effect” has come from an increase in home equity in periods of real estate booms or making successful investments in the stock market. However, surprisingly the study shows that an increase in home equity has a more immediate effect on home owners than making successful investments in the stock market. Many became more willing to borrow against their homes like piggy banks either through refinancing or second mortgages during the real estate boom.