http://www.forbes.com/sites/investopedia/2014/01/28/a-study-on-the-wealth-effect-and-the-economy/2/#154cbef468a4
The above links to a Forbes article from 2014 regarding the "wealth" effect. This article and the economic theory behind it imply that people convert some of their wealth to income and spend it in times of increases in asset prices. The research can be interpreted to be conflicting, but it appears that the wealth effect is more pronounced for wealth associated with housing price increases than with stock price increases. The suggestion in the article is that this may be due to the perception that stock wealth increases are considered more ephemeral (or risky, in economic terms). The writer ultimately derides using your home as an "ATM" for current consumption at the expense of future consumption.
But what about using your home to arbitrage investments? Miller-Modigliani proves that, in efficient markets, debt is simply negative cash and if an opportunity exists to create additional wealth or income by investing in another asset then you should jump at it. Many people leveraged their primary residences and bought second (and third) homes, investment real estate, and other assets like stocks and bonds during this period of time to increase wealth. These are seemingly rational responses to incentives. When it was discovered that markets not directly related to housing or stocks were inefficient (the CDO crash), many assets lost value due to the waterfall effects. More research is needed here to uncover the vectors of inefficiency before drawing conclusions about what to do with wealth. Converting wealth to income is certainly not always a bad thing, even when the conversion is for consumption, if future income is rationally assessed to be greater. But, I would argue, the circumstances of the conversion and the ultimate use of the funds can have a chicken-and-egg effect on asset pricing.
But what about using your home to arbitrage investments? Miller-Modigliani proves that, in efficient markets, debt is simply negative cash and if an opportunity exists to create additional wealth or income by investing in another asset then you should jump at it. Many people leveraged their primary residences and bought second (and third) homes, investment real estate, and other assets like stocks and bonds during this period of time to increase wealth. These are seemingly rational responses to incentives. When it was discovered that markets not directly related to housing or stocks were inefficient (the CDO crash), many assets lost value due to the waterfall effects. More research is needed here to uncover the vectors of inefficiency before drawing conclusions about what to do with wealth. Converting wealth to income is certainly not always a bad thing, even when the conversion is for consumption, if future income is rationally assessed to be greater. But, I would argue, the circumstances of the conversion and the ultimate use of the funds can have a chicken-and-egg effect on asset pricing.
