In this short post, I review the data on the rise and fall in residential housing wealth and try to quantify its effect on aggregate consumption. This is an important question in gauging the depth and length of the recession that lies ahead.
Prior to the current situation, the U.S. economy witnessed an unprecedented boom in home values. Between June 1996 and June 2006, the Case-Shiller house price index for the 10 largest metropolitan areas in the U.S. almost tripled from 77.8 to 226.3. This amounts to a whopping growth rate for home values of 17% per year. Supporting this picture, the Flow of Funds data show that residential real estate wealth increased from $10 trillion to $24 trillion over the same period. Averaged over the two-thirds of households that are home-owners (68 million households), that amounts to an increase of $200,000 in housing wealth.