Read it here first: Real-Estate Boom Soon May Sputter As an Engine of Retail Sales
A key part of my Bearish thesis for 2006 has been that as interest rates tick up, the Real Estate cylinder in the economic engine will fade.
Yesterday's WSJ had a good article on that exact subject:
"As home sales start to slow and the inventory of unsold homes rises, some economists are warning that home-price appreciation will slow or prices will possibly even decline next year. And that, they say, will lead to a slowdown in consumer spending that could start as soon as the holiday season ends.
Leading the worrywarts are economists at Goldman Sachs Group Inc. For several years, they have been closely watching what the firm dubs MEW, which stands for mortgage-equity withdrawal. It is the cash people extract from their homes by drawing on home-equity loans, "cash out" mortgage refinancing, or capital-gains earnings from real-estate sales...
Jan Hatzius, a Goldman Sachs economist, estimates Americans will withdraw $834 billion from residential real estate this year. That will fall next year, he says, to $758 billion and to $645 billion in 2007. "As households' cash flow goes down," Mr. Hatzius says, "spending weakens." That, in turn, will reduce economic growth.
Equity withdrawal isn't the only way that housing is supporting the economy. According to Moody's Economy.com, the real-estate industry is responsible for creating 1.1 million of the two million net jobs that the nation added in the five years that ended in October. Those jobs include positions for land surveyors, general contractors, loan officers and building-material retail workers."
Note that the ugly part of the accompanying chart (via Goldman Sachs) are projections, and not actual declines:
MEW= Moprtgage Equity Withdrawals
A few other data points on this:
A study (supposedly co-authored by Fed Chair Alan Greenspan) estimated that "Americans withdrew $600 billion in equity from their homes in 2004, or 7% of their disposable income." Greenie's study estimated "consumers spend about 51% of the cash they extract." Goldman's estimates were that consumers spend ~68% of the cash they extract through home-equity loans and refinancing (most of the rest is used to pay down credit-card debt or invest).
WSJ: "In other words, Goldman believes that consumer spending is even more closely tied to home equity than does the Fed. If Goldman is correct, that means the housing slowdown will have a bigger negative impact on spending and the economy than commonly thought."
See also Unsold house inventory highest since April 1986
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Sources:
Real-Estate Boom Soon May Sputter As an Engine of Retail Sales
Rafael Gerena-Morales
The Wall Street Journal, November 28, 2005; Page A2
http://online.wsj.com/article/SB113313262641207626.html
Unsold house inventory highest since April 1986
BY TAMI LUHBY
Newsday, November 29, 2005
http://www.newsday.com/business/ny-bzhome294531670nov29,0,5463507.story
Tuesday, November 29, 2005 | 08:54 AM | Permalink
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What's your take on possible effects of home heating costs this winter exacerbating the cooling (heh!) housing market? I read James Kunstler mostly for entertainment, not for clear-eyed prognostication. However, he does make a pretty compelling argument this week.
The price of natural gas is back to where it was just after Katrina-and-Rita : about $11.50, which is roughly 400 percent higher than it was as recently as 2002. The longstanding assumption that home heating comes cheap will go down hard in this country. The homebuilding industry is going to get crushed. They will be stuck with tens of thousands of already-built spec houses in the larger-than-3000 square foot range, with great rooms, lawyer foyers, and other heat-sucking features, and they will have tens of thousands more of them under construction or tagging close behind in the permitting process. Practically all of them will be located in the remotest suburban asteroid belts, since the closer-in ones have already been built on.
Add to this predicament the number of people already living in houses like this who may be desperately looking to get out of an increasingly ominous trap, perhaps compounded by additional problems with "creative" mortgages that have left them leveraged above their eyeballs. Some of them will be looking at heating bills as high as their monthly mortgage payments around Christmas time. If enough of them panic this winter, the housing bubble, which is already deflating, will simply fly to tatters and shreds.
Posted by: -cman- | Nov 29, 2005 10:15:49 AM
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