Monday, January 23, 2006

Consumer Spending to Dry Up

I'm usually not a doom and gloomer regarding the broader economy, but I'm starting to think that for at least the past 2 years, consumer spending has been mostly fueled by the housing boom. Anecdotally, I see lots of people barely making $100k that are spending like they make $300k because they have managed to extract equity from their house. When house prices fall, and the equity is no longer their to extract, I think a lot of people are going to be on some pretty tight budgets and there won't be as many shopping trips to the Grove as there used to be.

This is from the Financial Times

snip...

[Mr Morris says a “bubble zone” has been created where house prices are overvalued by 35-40 per cent, equivalent to $6,000bn. Although this bubble could take time to deflate, Mr Morris warns that “the consequences of a punctured housing bubble could be traumatic”. Even a soft landing of zero house price growth, he says, will dry up the mortgage equity withdrawal that has fuelled consumer purchasing. Consumer spending makes up two-thirds of the US economy.

“There are already signs of softening in the new homes market in the US if you look at prices and the number of sales. That is going to hit discretionary spending,” says David Bowers, chief global investment strategist at Merrill Lynch.

It is widely believed that the “wealth effect” created by the housing boom has been the driver behind consumer spending. If the UK is anything to go by, a stagnation in the US housing market will be followed by a sharp decline in consumer spending.]

Full article...

7 Comments:

Anonymous Anonymous said...

I am a doom a gloomer, although I don't let it get me down.

For the last couple of years at least, and in some cases before that, some real economic heavyweights, i.e., Paul Volcker, Steven Roach, Bill Gross, have been expecting things to turn south.

The only explanation for why it hasn't seems to be the massive infusion of capital from the Fed and other central banks. The Fed has been at it since about 1998 and Japan has printed so much yen, that if we weren't accepting in exchange for treasuries I think it would be littering their streets.

There has to be an endgame. All that liquidity has flowed into debt instruments, both treasuries and Mortgages (I think purchases of MBS could be in for a very rude awakening in a couple of three years).

Sooner or later housing prices will return to the mean and in all likelihood it will occur with a slowdown in the overall economy.

The escape hatch of home equity borrowing could well be sealed when people need it most and things could get pretty ugly.

In Monmouth County money runs a lot deeper than other places, but it is not a bottomless well.

Tuesday, January 24, 2006 9:23:00 AM  
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Blogger rbyzell said...

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Tuesday, January 24, 2006 6:12:00 PM  
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