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Falling home prices threaten economy

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If rising home prices helped the economy bounce back from the dot-com stock market crash by allowing homeowners to convert their growing equity into disposable cash, few are counting on such relief today. A new study suggests that falling home prices will only make the current economic downturn worse, by significantly reining in consumer spending. The study, by economists at the USC Lusk Center for Real Estate and the UCLA Ziman Center for Real Estate, found that between 1989 and 2001, changes in housing wealth had about three times the impact on consumer spending as other sources of wealth, such as stock holdings. The study concluded that a 10 percent decline in housing wealth may reduce consumer spending by $105 billion -- the equivalent of a 1 percent reduction in real gross domestic product growth. During the housing boom, many homeowners used their homes like ATM machines, converting paper gains in equity created by rising home prices into cash to finance purchases ...