U.S. stocks have reached new highs, but most Americans probably don’t feel any wealthier. That’s because the prices of our homes have a bigger influence over how rich we feel and, therefore, how much we’re willing to spend, suggests a recent study by the National Bureau of Economic Research.
The findings clarify the big drivers of what economists call “the wealth effect,” the idea that people spend more when they have more. This sounds pretty obvious, but the real barometer of wealth hasn’t been as clear. In the past, as the Federal Reserve moved to buy up billions of dollars worth of bonds to boost the economy, Chairman Ben Bernanke said that higher stock prices boost consumer wealth. And in turn, the extra spending helps the economy grow.
While that might be true, as it turns out, home prices trump any run-up on Wall Street. This is probably not that surprising, given that most Americans have relatively modest amounts of cash tied up in equities, 401ks, IRAs and investment accounts.