House of Cards

Most Americans largest asset is their home

When our homes value goes up, we feel wealthier and spend more

When our homes value goes down, we feel poorer and spend less

This is a phenomenon called the wealth effect.

Positive wealth effects cause increase in consumer spending .

Negative wealth effects cause decreases in consumer spending.

With home sales falling, home prices decreasing, and several other headwinds working against the housing market, a negative wealth effect is coming.

Home buyers are backing out of deals at the highest rate since the pandemic began

Existing home sales are down for the 6th consecutive month – down nearly 26% in that time

Homebuilder sentiment is down 8 months in a row

These are all leading indicators telling us that continued home price decline is likely

Home price declines will lead to reduction in the amount of equity we have in our homes

Which will in turn lead to a decrease in access to the easy credit that equity provides

Less HELOCS, less cash out refinances, fewer construction loans, fewer home equity loans

All of this will lead to decreases in consumer spending and an overall decrease in the average homeowners wealth

All of which will amplify the intensity of any coming economic downturn

To end on a more positive note:

Recessions happen and it’s good to be prepared for them

But over the long term things are generally more positive than negative

And over the 5 year period following an economic crisis recoveries are extremely resilient

The key is to avoid panic by being prepared

The above rant is accompanied by the usual ensemble of articles and videos on my website that can help you prepare for what’s to come.

https://www.thepeakfp.com/blog/house-of-cards