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Feature And, according to Dean Baker of the Center for Economic Policy and Research, there is a difference between the wealth effect of housing and stock. "The wealth effect on consumer spending from stock wealth is generally estimated to be much lower than the wealth effect from housing wealth," Baker said. "The range from the former is typically estimated at 3 to 4 cents on the dollar, as opposed to 5 to 7 cents on the dollar from housing wealth." "The housing wealth effect has been overstated," Calomiris, Miles, and Longhofer said in their analysis three years before the new Case-Shiller-Quigley research. "While we do not deny that housing is perhaps the most important sector of the economy with respect to business cycle fluctuations, that link likely reflects channels other than the housing wealth effect," Calomiris, Miles, and Longhofer wrote. A Good Defense O ne explanation came from Harvard economist Edward Glaeser, who noted a house is both an asset and a necessary part of outlays, making the impact of a change in housing values (wealth) on consumption difficult to measure. Housing, according to the monthly consumer price index report, represents about 42 percent of consumer spending. "Glaeser's theory," Case, Shiller, and Quigley insisted, "is belied by the public's widespread impression that increased home prices make them very much better off. Part of the reason may be psychological, due to the salience of home price increases and myopic failure to consider that there cannot be such an advantage if most other households have experienced the same price increases." But, they added, "a second way to approach the topic of consumer spending out of home price appreciation is to simply look at the cash flows." They noted former Federal Reserve Chairman Alan Greenspan and Fed economist John Kennedy did just that, examining equity withdrawals and their contribution to spending. Greenspan and Kennedy, they said, "in an extensive data collection exercise, produced careful estimates of all the free cash and credit extracted from the housing stock since 1990" and found "during the housing boom of 2001–2005, an average of just under $700 billion of equity was extracted each year by home equity loans, cash-out refinance, and second mortgages" adding to consumer spending. In their earlier study, before the housing bubble burst, Case, Shiller, and Quigley looked at regional housing values and found when housing wealth dropped, household consumption "declined only marginally." The new, updated study included more than twice as many data points from which they constructed a variety of economic models. "When the more recent volatile period is included in the analysis, we find that the relationship between housing market wealth and consumption is a good bit stronger, relative to the link between stock market wealth and consumption," they concluded. "The data now include substantially more variation in asset prices, notably periods of declining house prices and declining stock market indices, and show that declining house prices do lead to a lower level of consumer spending." we build your valuation solutions It's the Pro Teck way. Call us today to learn how Pro Teck can help your company succeed. I 800.886.4949 www.proteckservices.com AMC ServiCeS | DeSK revieW | DUe DiLiGeNCe | BPO | COLLATerAL POiNT | AvM/ANALYTiCS | HOMevALUeFOreCAST.COM 36 | The M Report