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U.S. Consumers, Unfazed by Real-Estate Slump, Keep on Spending
November 13, 2006 (Bloomberg)
Lynette Gutridge's house in Silver Spring, Maryland, is no longer rising in value as it did in recent years. That didn't keep her from looping by Westfield Wheaton Mall after she voted Tuesday.
"I've not modified my spending," said the 58-year-old psychologist, toting two new pairs of shoes from Ann Taylor as she headed for Macy's.
Like Gutridge, American consumers nationwide are continuing to make tracks for malls and shopping centers, defying the forecasts of some economists who predicted the yearlong housing slump would keep them at home.
Combined with falling energy prices and a pickup in job and income growth, the buying spree heralds robust holiday sales and economic momentum heading into the new year, economists say.
"Consumers have been reported to be dying time and again, and they've risen from the ashes," says Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh and a former Federal Reserve economist. "Housing is a major negative for the economy, but the consumer is still the best defense against recession in 2007."
Hoffman is among economists, including those at Bear Stearns Cos., Lehman Brothers Holdings Inc. and Credit Suisse Group, who are rethinking their forecasts for consumer spending. The median estimate has risen to 3 percent this quarter, according to Bloomberg's latest monthly survey of economists, up from the 2.8 percent estimate in October.
AntiSpin: Two words for Hoffman, et al, with respect to housing prices and consumer spending: "lag time."
As our John Serrapere points out in Escape from Normalville, there is a strong correlation between declines in housing prices and declines in consumer spending–but with a one year lag.
According to a report by Eric Belsky & Joel Prakken, "Housing Wealth Effects: Housing’s Impact on Wealth Accumulation, Wealth Distribution and Consumer Spending," Joint Center for Housing Studies, Harvard University, December 2004, page 2: “Consumers spend about 5 cents (5.5%) out of every dollar increase in housing or stock wealth in the long run. It takes about one year for spending from housing to reach four fifths of this long-run effect compared with several years for stock wealth.”
For example, a $25,000 (11%) decline in median home values from $225,000 to $200,000 can be expected to result in a $1,250 (5%) reduction in per household consumption, or roughly $50 of reduced spending for every $1,000 in housing price decline, about a year after the housing price decline.
The ongoing decline in housing wealth will have a greater impact on real GDP than stocks because 1) fluctuations in home values are transmitted to household consumption more quickly than stock prices, and 2) housing wealth is three times as great as stock wealth in relation to household net worth.
The housing bubble peaked in mid-2005. The first stage is a dramatic drop in the number of transactions. Price declines do not start for another six to nine months after that, in this case Q2 2006. That puts our unstoppable consumer on the ropes around Q2 2007, more or less when the 2007 recession is likely due to arrive for other reasons, including the collapse of the private equity bubble.
November 13, 2006 (Bloomberg)
Lynette Gutridge's house in Silver Spring, Maryland, is no longer rising in value as it did in recent years. That didn't keep her from looping by Westfield Wheaton Mall after she voted Tuesday.
"I've not modified my spending," said the 58-year-old psychologist, toting two new pairs of shoes from Ann Taylor as she headed for Macy's.
Like Gutridge, American consumers nationwide are continuing to make tracks for malls and shopping centers, defying the forecasts of some economists who predicted the yearlong housing slump would keep them at home.
Combined with falling energy prices and a pickup in job and income growth, the buying spree heralds robust holiday sales and economic momentum heading into the new year, economists say.
"Consumers have been reported to be dying time and again, and they've risen from the ashes," says Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh and a former Federal Reserve economist. "Housing is a major negative for the economy, but the consumer is still the best defense against recession in 2007."
Hoffman is among economists, including those at Bear Stearns Cos., Lehman Brothers Holdings Inc. and Credit Suisse Group, who are rethinking their forecasts for consumer spending. The median estimate has risen to 3 percent this quarter, according to Bloomberg's latest monthly survey of economists, up from the 2.8 percent estimate in October.
AntiSpin: Two words for Hoffman, et al, with respect to housing prices and consumer spending: "lag time."
As our John Serrapere points out in Escape from Normalville, there is a strong correlation between declines in housing prices and declines in consumer spending–but with a one year lag.
According to a report by Eric Belsky & Joel Prakken, "Housing Wealth Effects: Housing’s Impact on Wealth Accumulation, Wealth Distribution and Consumer Spending," Joint Center for Housing Studies, Harvard University, December 2004, page 2: “Consumers spend about 5 cents (5.5%) out of every dollar increase in housing or stock wealth in the long run. It takes about one year for spending from housing to reach four fifths of this long-run effect compared with several years for stock wealth.”
For example, a $25,000 (11%) decline in median home values from $225,000 to $200,000 can be expected to result in a $1,250 (5%) reduction in per household consumption, or roughly $50 of reduced spending for every $1,000 in housing price decline, about a year after the housing price decline.
The ongoing decline in housing wealth will have a greater impact on real GDP than stocks because 1) fluctuations in home values are transmitted to household consumption more quickly than stock prices, and 2) housing wealth is three times as great as stock wealth in relation to household net worth.
The housing bubble peaked in mid-2005. The first stage is a dramatic drop in the number of transactions. Price declines do not start for another six to nine months after that, in this case Q2 2006. That puts our unstoppable consumer on the ropes around Q2 2007, more or less when the 2007 recession is likely due to arrive for other reasons, including the collapse of the private equity bubble.
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