If consumers use their house as collateral for lending and the value of housing in general falls, then

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If the value of housing in general falls, then the value of consumers' houses used as collateral also decreases. This makes it riskier for lenders to lend money to consumers and they may reduce lending or increase interest rates. As a result, aggregate consumption decreases as consumers have less access to credit.

If Consumers Use Their House as Collateral for Lending and the Value