The Wilder View

In 2008, adverse housing wealth effects killed consumption

This recession is especially rough because of the record retrenchment in consumer spending. High gas prices, the financial crisis, and a dismal housing market pushed consumers to the brink. The current cycle is set to be the worst consumer spending cycle since 1950.


The chart illustrates annual growth in quarterly GDP and private consumer spending (the C out of Y = C + I + G + NX) spanning the years 1947:2 to 2009:1 (forecast). The forecast in 2008:4 and 2009:1 is based on Wachovia’s published forecast and consistent (if not slightly more benign than) with consensus expectations of the BEA’s GDP release on Friday. Consumption is expected to reach -2.0% annual growth by 2009:1 (-1.5% in 2008:4), it’s biggest decline since 1951:3. Consumers have been shocked with high gas prices before and survived; annual consumption growth hit a low of -1.0% in the early 1980’s. However, the quick evaporation of housing equity in the last year took households by surprise.

According to the S&P Case-Shiller composite-20 monthly house price index, national home values fell 16.4% in 2008 alone through November (just eleven months). That is 6.4% more than the decline from the housing price peak in July 2006 through the end of 2007 (10.4%).


The chart illustrates the regional loss in home values over the same two periods: eleven months of 2008 through November, and from the peak in activity through December 2007. Across most regions, home values fell sharply in 2008 (only through November) relative to the previous period declines.

  • Phoenix saw the biggest declines in 2008, -30%, and a relatively mild decline through 2007, -17%.
  • Las Vegas, Miami, San Francisco, San Diego, and Los Angeles saw a similarly devastating slash in home values in the eleven months of 2008.
  • Portland saw a sharp decline in the eleven months of 2008, -11%, compared to the previous 16 months, -2%.
  • Dallas, Denver, Cleveland, and Boston are the only cities to see smaller declines in 2008 relative to the previous period.

The qualitative evidence is incontrovertible: this cycle is marked by serious adverse real estate wealth effects. On average (as measured by the Case-Shiller composite 20 index), home values have been declining since July 2006 – over two years – but households saw their biggest declines in home equity in just eleven months of 2008. The associated pull-back by consumers will set records, as households retrench amid record housing equity losses.

Originally published at the News N Economics blog and reproduced here with the author’s permission.

One Response to “In 2008, adverse housing wealth effects killed consumption”

GuestJanuary 30th, 2009 at 6:24 am

And add in the value of stocks, retirement funds, IRA’s etc. and consumers feel extremely hard hit. I am 61 and a number of my friends approximately the same age, have been hit hard in their retirement funds or in small business and finding themselves close to bankruptcy. Most good business executives plan for hard times, but very few have planned for such hard times.

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