James Surowiecki spells it out:
It’s well established that when housing prices go up people feel richer and spend more: the rule of thumb is that they spend between five and seven per cent of the increase in housing wealth. But when housing prices go down people cut their spending by the same amount in response. Between 2006 and 2011, American homeowners saw the value of their homes drop by seven trillion dollars or so. That means that—even if consumers had no debt at all—we’d expect a dropoff in consumption of about four hundred billion dollars.
Brad Plumer eyes the implications:
If Surowiecki’s right, then it means policies to ratchet down household debt — like the White House’s plan to help homeowners refinance their mortgages at low rates — may not do all that much to boost consumption. Americans are already spending about as much as they can, even with their current debt loads. Something else needs to help consumers close the gap.