Consumer Spending and the Housing Market

By Lee Russ

Tuesday, May 08, 2007 at 07:58 AM

The housing market weakness is hardly an isolated concern, especially in light of the general view that housing equity has supported a lot of the rising consumer debt in America.

Recent days have produced a flurry of info on the housing market's effect on the overall economy, and, most importantly, on consumer spending.

The Federal Reserve web site posted a research paper by Alan Greenspan and James Kennedy on the effect that cashouts, refinancings, etc. of home equity have had on consumer spending. It is a very dense paper, but the highlights as reported by Bloomberg are that extraction of home equity financed 2.9 percent of overall consumer spending from 2001-05 compared with 1.1 percent from 1991-2000.

Already there is talk by industry types that the current housing weakness is having an impact on spending in the economy of both the U.S. and foreign countries where remittances from the U.S. play a big economic role (like Mexico).

To give you an idea of how much spending has been financed by home equity, consider that consumer spending was pegged at $7,057.60 (in billions) for Q3 of 2001 by the Bureau of Economic Analysis. Three percent of that would be more than $220 billion. That's a lot of spending that could be negatively affected if housing sales and prices continue to fall.

And keep in mind that home equity can also indirectly finance consumer spending. While some homeowners may draw down their equity to get cash, other simply run up credit cards or other debt, knowing they have their home equity in reserve to help pay off the bill.

The worst case scenario is that this marks the beginning of a downward spiral in which housing reduces spending, which reduces corporate profits, which costs jobs, which continues to affect housing, and so on. The next round of reports of corporate profits, consumer spending, and housing sales/prices should be interesting.