I would agree that a rising or declining home value would not necessarily change consumption values as an effect of feeling more or less wealthy.

However, rising home values create resources that a lot of pundits seem to suggest homeowners used to fund consumption.

One common way of tapping equity seems to have been leveraging increases in home values to refinance mortgages. If you take out a subprime loan with a two year "teaser" rate, and the home price appreciates significantly, you can use the added value as collateral to refinance the mortgage at a lower rate.

When this failed to happen recently, the rates reset, and set off the current rash of foreclosures.

Other homeowners seem to have tapped rising home equity as collateral for loans that they used to fund consumption. This source of credit is not likely to be available to many homeowners for a while, and could either lead to reduced consumption, or alternative sources of credit. Credit card companies seem to like people who make poor financial decisions.

http://mitchforth.blogspot.com

This process was called "Equity Harvesting," instead of what it was, "taking out a second mortgage for no apparent reason."