Abstract
Home value growth has played an important role in mitigating the effects of the 2001 US economic recession and sustaining subsequent economic growth. Home price appreciation builds home equity, which stimulates consumption expenditures in two ways. The first channel is through a wealth effect on consumption; a number of studies have found that the home equity wealth effect is much stronger than the stock equity wealth effect. Second, home equity extraction through first mortgage refinance or placing of second mortgages enables additional home improvement and consumer durable spending. Home values are driven by local economic conditions, not a valuation bubble; local markets with a strong economy will continue to enjoy house price growth above the national average, while weak economies will also experience weak house price performance.
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