The impact of the “Wealth effect” on consumer behavior and U.S. politics

The Wealth Effect: How Rising Home and Stock Prices are Impacting Americans

In a time of economic uncertainty, the wealth effect is playing a significant role in the financial well-being of many Americans. The stock market has seen a resurgence in recent months, with the Dow Jones and S&P 500 indexes climbing steadily after lackluster performances in 2022 and 2023. However, rising tensions in the Middle East and uncertainty over interest rates have caused a bit of a reversal in the market.

Despite these challenges, the S&P 500 has risen more than 21% since the stock market rebound began in late October. Home prices have also soared during the pandemic era, remaining near record highs. This has led to the “wealth effect,” where people who own homes and stocks feel wealthier and more inclined to spend.

According to the Federal Reserve Survey of Consumer Finances, the median net housing value for families that owned a home rose significantly from 2019 to 2022. This means that the typical homeowner enjoyed a 45% increase in net home value in just three years.

Individuals like Evan Karr, a mortgage loan officer, have been able to leverage this increase in home equity to upgrade their living situations. Karr and his family recently purchased a new fixer-upper in Portland, Oregon, after selling their previous home for a substantial profit.

Real estate brokers like Israel Hill are seeing more clients cashing out their home equity to invest in new properties or trade up. The wealth effect is not only boosting consumer spending but also has potential political implications, as a rising stock market historically benefits the incumbent party in presidential election years.

Overall, the wealth effect is shaping the financial landscape for many Americans, providing a sense of increased wealth and stability in an otherwise uncertain economic climate.