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Housing equals true wealth effect

Guest perspective: Economic well-being now 'mortgaged' to real estate

Studies show that consumer confidence and thus consumer spending is highly correlated with housing prices. The true "wealth effect" is not in stocks, but in homeowner equity. Thus, as home values continued to rise throughout the recent bear markets and recession, consumers were not as worried as in past recessions, and therefore barely skipped a debt-financed consumer spending binge. The Fed helped foster this mood by creating the climate for ever lower mortgage rates. Let us make no mistake, housing prices are linked to two key factors: demand and interest rates. Demand, it seems, is also spurred on by lower mortgage rates. Since much of our future economic well-being is mortgaged to the housing market, it will serve us well to look at a few facts. Let's go to the Web site of the National Association of Realtors to see what we can glean from existing home sales. First, we went on a buying binge as a result of the low rates of this summer. Home sales peaked at a seasonally adjus...