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When home prices rise, homeowners tend to spend more money. In some cases their newfound real estate wealth emboldens them to save less and spend more, while in other cases they actually borrow against increased home values to increase their spending money. In either scenario, the net effect is that people buy more stuff.
This so-called “wealth effect” is a widely acknowledged side effect of asset market booms.
The accompanying graph attempts to measure the wealth effect in San Diego by displaying year-over-year growth in both home prices and retail employment since our little housing boom really took off in 2003.
And while the magnitude of moves in each series are different (home prices having been changing about 10 times as much as retail employment), the correlation between home prices and retail employment is almost picture perfect.
The housing wealth effect has clearly been at work here in San Diego.