From Bloomberg:
Stiglitz Says U.S. Housing Slump Will Stunt Consumer Spending
A slowdown in the U.S. economy may be prolonged as a house-price drop cuts off a source of funding for consumers, said Joseph Stiglitz, a Nobel economics laureate.
“The average price of housing in the U.S. is already falling,” Stiglitz said in a speech in Tokyo today. “That will be a big problem for the U.S. and if it is a problem for the U.S., it’s going to be a big problem for the global economy.”
A U.S. real-estate recession sparked by defaults on home loans to borrowers with poor credit histories may worsen as stricter lending rules and higher mortgage rates make it more difficult for potential buyers to get financing. A drop in consumer spending in the world’s biggest economy may depress demand for exports in countries from China to Germany.
Stiglitz estimates that last year between $850 billion and $950 billion was taken out of the value of homes in mortgage- equity withdrawals, with a “significant fraction” translated into consumption and helping to offset the effect of higher oil prices.
“It is hard to see how this level of spending will be sustained as long as house prices decline and mortgage lending rates go up,” he said.
There is also a risk that the problems of the subprime market will spread, Stiglitz said, estimating that 1.7 Americans will lose their homes over the next year as charges rise on variable-rate loans.
“As all that housing is thrown into the market, it depresses prices and that means some mortgage holders will be under water — or the value of their homes will be less than their mortgages,” he said.
Housing prices in 20 U.S. metropolitan areas fell 3.9 percent in the 12 months through July, a report showed Sept. 25.
The International Monetary Fund cut its forecast for U.S. growth last week.
The answer is a big yes on this. I think people have completely tapped out their home ATM’s during this boom and now will spend many years paying that off.
I don’t think it has shown up yet because it’s not as obvious with people making minimum credit card payments and other loans not being scrutinized in public as much as mortgages.
1.7 Americans!
Agree with BklynHawk. One reason that the jobs picture hasn’t gotten more attention is that the home piggy-bank has masked the fact that prices are going up and wages are remaining stable or declining (the latter for those who find themselves out of work and having to look for new jobs). Why do you think immigration is such a big issue now? It’s all a huge distraction from the systematic evisceration of the middle class emanating from Washington.
Nothing surprising .Homeowner have unrealistic sale price expectations( my self included).We got spoiled by awesome profits from homes for way to long. If we are were to be realistic no home is actually worth that much money. More realistic view would be to 30% -50% in home price reductions.
Like so many things, the media gets the cause and effect exactly wrong. Consumer spending isn’t going down because home prices are dropping – its going down because they went up too far too fast. Like a fire in an enclosed space that sucks up all the oxygen leaving people to die not from smoke or burns but from asphyxiation, I believe that consumer spending is falling because every last dollar of a $50k salary is going to pay the $500k mortgage.
I see it in parts of North Jersey but things are selling. Try to move to the Jersey Shore Belmar, Wall, Point,
Things don’t look so bd prices are high and not falling much My question is: Will the shore area see price declines for the middle class sitting on the sideline potential buyer?