As stocks flag and home prices dip, consumers spend less, spend different
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If you have investments in just about anything, the news lately has been nothing but bad.
The Nasdaq, for example, is down around 30% so far this year. So your 401(k) might well be too.
And Tuesday we learned that even the value of your home may have declined recently. The S&P CoreLogic Case-Shiller home price index went down from June to July. It’s the first time that happened since January 2019.
In economics, there’s something called the wealth effect, which is the theory that when the value of assets like a house or a 401(k) go up, households spend more money because they feel better about their finances.
But what happens when those assets decline?
Nate Oester has lots of tabs on his screen during work: email, Twitter, news sites and his 401(k).
He said he ritually opens the investment account every morning. “It’s there and I could check it, embarrassingly, I dunno, 100 times a day.”
Oester is no day trader on the verge of retirement. He’s a 40-year-old electrical engineer in Denver.
Back in 2020 and 2021, that tab was usually instant dopamine.
“You know, it’s like getting a like on a post on Facebook or Instagram,” he said.
But this year, “it’s more of an emotional downer and a feeling like I have no control over this,” Oester said.
Feeling less wealthy makes you less likely to spend money, said Stephanie Tully at the University of Southern California Marshall School of Business.
Her research suggests feeling pinched also shifts spending from services to goods.
“People’s propensity to buy things, like a revolving tie rack or a heated toilet seat, those become more attractive relative to experiences like going out to eat when you feel financially constrained,” Tully said.
You know the old saying: A heated toilet seat will last you years. A steak dinner will last you, well, not as long as a heated toilet seat.
The stock market has tanked much harder than housing prices, but a decline in home values could also impact consumption.
Economist Adam Guren at Boston University said the refi piggybank is more expensive to tap now.
“If you’re trading in a 3% mortgage for a 6% mortgage, your monthly payment is going to go way up, and that’s going to limit the extent that people want to spend out of their home equity,” he said.
Of course, this is what Federal Reserve chief Jay Powell wants — skip the steak dinner, and the heated toilet seat, to fight inflation.
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