A Wealth of Common Sense: Why Housing Is More Important Than the Stock Market

For years, the concept of a “wealth effect” has been in place. When asset prices rise, investors feel wealthier. And they tend to spend more. Likewise, when prices are falling, investors tend to cut back on spending.

It’s become a bit of a self-fulfilling prophecy in a number of ways. Right now, the Fed is raising interest rates in the hope of getting consumers to cut back on spending, which should lower inflation.

However, that could put the economy at risk of a recession. Raising interest rates also raises the cost of home ownership.

Nearly two-thirds of Americans own homes but only about 50% of households own stocks. So any weakness in the housing market could have a major dampening effect on spending far more than a stock market correction.

The downside? For most Americans, home equity is their largest source of wealth. That wealth can become uncertain quickly in a weak real estate market. But if it leads to an unwinding of the wealth effect, the long-term effect of crushing inflation could be better in time.

In the meantime, the stock market is reacting more strongly to higher interest rates than housing. Wealthy Americans will likely add to their stock purchases as markets fall. So getting home prices to come off their massive increases of the past few years is the move to slow down the economy and stop inflation now.

To read the full analysis of why housing is more important than stocks, click here.