The government has data on the wealth effect. For every dollar of increased stock market wealth, an investor will spend x% more, and for each dollar increase in home equity he will spend y% more.

People in general believe home prices can only go up. They live for today. They do not think prices will stop rising, so they behave as if they will keep going up. The plan is to keep spending the equity. Some day, they sell the house, pay off all the equity lines and the mortgage, and use the remaining equity to fund retirement. They will either downsize or leave the area. Whereas people used to fund their retirement by saving and paying off their homes, now they are funding it by riding the wave of appreciation. In their ignorance, people believe this can go on indefinitely. They don’t think they ever need to live in their income limits.

In fairness, many people are forced into spending their equity, because wages have not kept up with inflation. Inflation is not properly measured with the CPI, and the things that are measured have downward pressure on them. Think cheap goods from China and lower wages from illegals. About half the construction industry is illegals and that keeps construction wages down. When people have an unexpected expense, out comes the credit card. Homeowners with equity will take out a HELOC to pay off that credit card.

Some spend their equity because we are a consumption nation. They are dependent on rising home prices to fund their lavish lifestyle.

Reality: prices stop rising or fall. Even if prices just stop rising, the gig is up. The MEW gig works only as long as prices keep rising. The market has peaked, and prices are falling. Within a year, MEW will be a trickle because home values are falling and people won’t have the equity to withdraw. Within 9 months after that, the last MEW money will be spent. By end 2007, early 2008, the MEW money will be out of our economy, and we will be in recession.