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: After a long winter, spring brought a touch of sunshine to American house prices. The latest Case-Shiller indices, released on June 30, showed that prices continued to fall in April: the ten-city index was 0.7% lower than a month earlier, and the 20-city index went down by 0.6%. But these falls were the smallest since June 2008. So even though house prices in America were still roughly 18% lower than a year earlier, many now suspect that the worst is over.

Such optimism may be premature. On June 30 the Office of the Comptroller of the Currency, a bank regulator, said that the number of foreclosures in process rose by 22% in the first quarter of this year, and that the number of prime mortgages with payments at least 60 days late went up by 20%. The government is stepping up its efforts to get people to take part in its anti-foreclosure programmes.

The focus on the housing market is understandable, not least because it has direct links with many other industries. But those who look to housing to lead a broader economic recovery also believe that house prices indirectly affect consumer spending, both by allowing people to borrow against the value of their homes and through something known as the “housing wealth effect”.

The theory behind the wealth effect runs as follows. Housing is one of the main assets in which people hold their wealth. Rising house prices make people wealthier, increasing the amount they have to spend over their lifetimes. And they will disburse some of it in the present, because they like to spread their spending roughly evenly over the course of their lives.

This thinking informs economic policy. The Federal Reserve, for example, uses a model of the economy in which housing wealth influences consumer spending to exactly the same degree that financial wealth does. And a number of attempts to measure the effect have found that it not only exists but is large.

Not everyone is persuaded. Willem Buiter of the London School of Economics has argued in the past that when house prices fluctuate, there are both winners and losers, but no net wealth effect. Charles Calomiris, Stanley Longhofer and William Miles are also sceptics.