There are some economic beliefs that I just don’t get.

I don’t get the worry about the foreign trade deficit. A big deficit is supposed to be bad, but the biggest deficits occur when our economy is the strongest and we can afford to buy a lot of other countries’ stuff, so a big deficit seems like a good thing to me. Likewise, I just don’t get the concern over the consumer confidence index. I know it’s supposed to tell us whether consumers will spend more or less in the near future based on they feel about the economy today. Trouble is, it’s hard to see much of a correlation. It may as well be the John Mark Karr Believability Index.

I mention that because there’s an oft-stated belief that’s gained steam recently, and I don’t get it, either.

The belief is that if housing prices swoon, it will cause so many people to chop back on their spending so drastically that it’ll cause a recession or worsen an existing one.

It’s easy to believe this because the rationale seems to make sense. The rationale is that as homeowners in the recent past amassed surprising equity in their homes, they were richer and spent more. They refinanced their homes or took out home equity loans and spent the extra money. The home-equity spending has gotten so pervasive that the economy has become dependent on it, the logic goes.

And as home prices fall, which they are widely expected to do, the opposite would happen. People would feel poorer. The economy would sour as consumers drastically cut spending. (For the latest in area home prices, see the package on Page 50 through Page 54 in this issue.)

Let’s dispense with this disclaimer: I don’t doubt that some people will get hurt by falling home prices, especially here in Southern California, the capital of overpriced homes. Especially those who took out adjustable-rate loans or negative amortization loans and the like when the housing market was at the top may well be squeezed, and painfully so.

I’m not talking about those relative few. I’m talking about the bulk of homeowners. Those who bought houses years ago for much lower prices.

Most such homeowners won’t be hurt much. If one’s house value falls from, say, $1 million to $900,000 or even $800,000, that homeowner’s is still paying the original $400,000 mortgage.

Sure, some of those people took out new loans against their ballooning equity and now have to pay bigger loan payments, but so long as they can keep making roughly the same payments tomorrow as they were yesterday, they’ll be fine.

That leaves us with the belief that the economy has become dependent on the money squeezed out of home equity. The flaw in that logic is that most of the home-equity money was spent not on lavish trips and needless, expensive baubles surely a little of it was but it was spent mostly to pay off debt, finance college and fix up the home. In other words, homeowners traded some of their real-estate asset for a different asset.

A drop in residential real estate values will not be good for many people in the local economy. But as for the belief that it would cause a severe downturn, well, I just don’t get it.

Charles Crumpley is editor of the Business Journal. He can be reached at

[email protected]

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