One way of looking at the current economy is that it’s the reverse image of a decade ago. Then, rising home values allowed households to increase both their debt and spending. Now, with home values lower, many families have had to tighten their belts and become much more frugal spenders. N.C. State University economist Mike Walden looks at evidence supporting this viewpoint:
We actually have a new study that made use of some unique data on local housing markets to test this interpretation, because what that interpretation would imply is that cities and neighborhoods where there was a bigger run-up in housing values and then a bigger crash would have had a poor economic performance in terms of higher unemployment rates, more bankruptcies, more foreclosures, et cetera
And to date, we really didn’t have any data that could look at that at this micro-neighborhood level. Well, now we do. We have a couple of economists who made use of some unique real estate data. And they were able to look at a neighborhood level and look at those neighborhoods where there was a real estate boom and a real estate bust, and indeed their evidence they found supported that viewpoint that those neighborhoods that had a bigger run-up in housing values but then had a bigger crash — first of all, those are the neighborhoods that where households did take on more debt and they spent more; this was all during the real estate boom. But then they sort of paid for that on the real estate bust by seeing bankruptcies go up, foreclosures go up, and then had a poor economic performance.
So it does, this study does seem to point out the essential problem that we’ve seen in the economy. And it’s been all tied to the cycles in real estate.