By Jeremiah Chessie and Will Cooke
In 2007-2008, the U.S. housing market collapsed, leading to the start of the Great Recession. The recession was the result of a combination of factors in the early 2000s. Factors included risky lending practices, for instance, some loans were given to borrowers with no income, no job, and no assets, which were called NINJA loans. In December 2007, when the Great Recession began, other factors at play were a lack of regulation and a bursting housing bubble, which was fueled by low interest rates, combined with risky lending practices. The housing market saw a large decrease in home prices and a steep rise in foreclosures. The Great Recession was a disaster in the U.S., resulting in widespread unemployment, a collapse in household wealth, and the economy experienced an overall contraction. Another consequence that came from the housing market collapse was a decrease in consumer spending. Before the recession, consumer spending was a key component of the economy, and during the recession, consumer spending collapsed. With about 69.5% of total GDP in 2007 being consumer spending, it is important to analyze how the housing market collapse affected consumer spending. By analyzing this relationship, the overall effect of the housing crisis on the economy can be further understood, as well as the relationship between wealth and consumer behavior.
In the article titled Household Leverage and the Recession of 2007 to 2009, Atif Mian and Amir Sufi discuss how household leverage growth and dependence on credit card borrowing significantly reduced durable consumption. The article shows that from 2000 to 2006, households increased their debt, and one of the main ways was through home mortgages. One of the findings in the paper is that during the recession, countries with more reliance on credit card debt cut back on durable goods spending at a steeper rate than those with less reliance. This work highlights the idea that the housing market collapse had a direct effect on consumer spending during the Great Recession. The authors provided insight on future ways to mitigate economic crises like the Great Recession. Some of those ideas were paying greater attention to the risks associated with rising household debt, as well as better regulation of lending practices.
Data Analysis
To highlight the effect of the housing market collapse on consumer spending, we focus on both the U.S. house price index and the U.S. personal consumption expenditure between 2000 and 2014. The graph below shows data from the U.S. Bureau of Economic Analysis, showing personal consumption expenditures from 2000 to 2014. In 2008, there was a decrease in personal consumption. Specifically, personal consumption expenditures dropped from a high of $10.159billion in June 2008 to a low of $9.805 billion in April 2009. This represents a significant decrease in consumer spending during the peak of the Great Recession. The drop in consumption can be attributed to an overall economic contraction, which was triggered by the housing market collapse. Additionally, it is noticeable that consumption did not return to its previous pre-recessionary levels until April 2010, showcasing a prolonged decrease in consumption.
The Housing Price Index fell during the Recession, followed by a decrease in consumption. In 2008, just before the collapse, the HPI was 372.23; by 2010, it had substantially decreased to 332.62. Intuitively, this makes sense because there was a decrease in consumer confidence now that people’s houses have depreciated. When home values dropped, people had less equity in their homes, which reduced the amount of money they could use to take out loans to consume more in the economy. Additionally, a reduction in the value of homes could signal signs of an economic downturn in the housing market, leading to consumers saving more than they would in a strong economy. The correlation between a fall in the HPI and a decrease in consumer spending is illustrated through the graphs below. As shown, at the end of 2007, the start of the Great Recession, there was a decrease in the HPI, resulting in a decrease in consumer spending soon after.
Figure 1
Source: U.S. Federal Housing Finance Agency
Figure 2
Source: U.S. Bureau of Economic Analysis
Conclusion
This blog post looked at the effects of the housing market collapse on consumer spending during the Great Recession. The data gave a clear indication that the housing market collapse resulted in a significant decrease in consumer spending. One of the main factors was an increasingly large mortgage debt among homeowners leading up to the collapse. When the collapse ultimately occurred in December 2007, consumer spending was greatly reduced. Future research could examine the relationship between household debt and specific aspects of consumer behavior, like spending patterns and long-term financial planning. Understanding these dynamics can help policymakers design more effective safeguards to prevent similar economic downturns in the future. Additionally, it may provide insight into how consumer confidence and perceived financial stability influence broader economic trends.
References
1. Mian, Atif, and Amir Sufi. “Household Leverage and the Recession of 2007 to 2009.” National Bureau of Economic Research, vol. Working Paper 15896, Apr. 2010, https://www.nber.org/system/files/working_papers/w15896/w15896.pdf.
2. U.S. Federal Housing Finance Agency, All-Transactions House Price Index for the United States [USSTHPI], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/USSTHPI, May 10, 2025.
3. U.S. Bureau of Economic Analysis, Personal Consumption Expenditures [PCE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PCE, May 10, 2025.