House Prices and the Wealth Effect

The Economist:

AFTER a long winter, spring brought a touch of sunshine to American house prices. The latest Case-Shiller indices, released on June 30th, showed that prices continued to fall in April: the ten-city index was 0.7% lower than a month earlier, and the 20-city index went down by 0.6%. But these falls were the smallest since June 2008. So even though house prices in America were still roughly 18% lower than a year earlier, many now suspect that the worst is over.

Such optimism may be premature. On June 30th the Office of the Comptroller of the Currency, a bank regulator, said that the number of foreclosures in process rose by 22% in the first quarter of this year, and that the number of prime mortgages with payments at least 60 days late went up by 20%. The government is stepping up its efforts to get people to take part in its anti-foreclosure programmes.

The focus on the housing market is understandable, not least because it has direct links with many other industries. But those who look to housing to lead a broader economic recovery also believe that house prices indirectly affect consumer spending, both by allowing people to borrow against the value of their homes and through something known as the "housing wealth effect".