Why Housing Is Such A Big Deal: In One Chart

Why Housing Is Such A Big Deal: In One Chart
Stéphane Renevier, CFA

over 1 year ago1 min

To understand why the housing market is such a key pillar of the economy, just take a look at the assets held by people across different wealth brackets. Real estate represents half of the total wealth of consumers in the bottom 50%, and a third of people’s wealth in the 10%-50% bracket. For 90% of Americans, that’s more than any other asset.

It matters. When house prices go up, people – particularly the bottom 50% – get richer, feel more confident, and can borrow more money against the value of their home. They’ll spend more on goods and services, which will boost economic growth. This, in turn, makes more people wealthier and enables more people to buy houses. That boosts sectors like construction, consumer durables, and financial services in the process. Put differently, rising house prices have a positive “multiplier effect” on the economy.

Unfortunately, the reverse is also true: when house prices fall, people cut back on spending, and economic activity slows down. Given that 70% of the economy is linked to consumer spending, this is often enough to push the country into a recession. And the impact could be even more striking this time around, with the bottom 50% already squeezed by high inflation costs.

So it’s worth keeping an eye on the housing market as it begins to show signs of weakening: the negative multiplier effect could make for a much more difficult economic environment ahead.

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