Falling House Prices to Dent Consumer Spending in US

The talk has turned.

Same people. Same place. Same subject. But when neighbours get together in the autumn of 2007, the conversation is likely to have an entirely opposite effect. Today, as in 2005, a group gathered for drinks is likely to be astonished at how much the house down the street sold for. Two years ago, the news was received with cool pleasure... It was as if a troublesome mistress had suddenly announced that she was moving to another town; the homeowner was delighted, but he didn’t want to be too obvious about it.

Two years ago, he went out and celebrated his good fortune by up-grading his kitchen, putting in granite countertops, and buying one of those huge, expensive refrigerators that leaks on the floor. Now, when the phone is silent at the granite countertop shop, it is he who isn’t calling. He’s heard that the house down the street sold for less than the price two years ago. Bummer. Two years of price gains wiped out. And the neighbours say the Schultzes are getting ready to sell...and the Morrisons still haven’t gotten a bid on their place. And if Mrs. Butler finds out about Mr. Butler and Miss O’Flanaghan...well...it will be splitsville for them...and another house on the block up for sale.

According to the Case/Shiller numbers, the average sale price was down 3.5% across 20 large US cities through June. But that was before the summer. And according to the homebuilders, it was in August that things really started to go bad.

Lennar (NYSE:LEN) says it can no longer sell houses at a profit in many areas. Final sales are off 40% from a year ago. No wonder. There are 4.5 million houses for sale nationwide – almost twice as many as early 2005. And futures trading, based on the Case/Shiller index, implies that housing prices will continue falling until 2010.

It is hard to imagine how consumer spending can hold up. There are only three sources of cash for most consumers: savings, wages, or credit. As to savings, forget about it. And wages are going nowhere. That leaves credit. He’s been living on credit for years, but it was credit secured by rising house prices. As his house went up in price, he was able to ‘extract’ some of his additional equity, known as Mortgage Equity Withdrawal, or MEW.

While the property market was purring along, MEW equaled about as much as the entire sum of GDP growth. Now, that source is gone too.

Almost inescapable result number 1: the consumer will have to spend less. Almost inescapable result number 2: the economy will go into recession.

Consumer spending is more than 70% of the US economy. No economy in history ever depended so much on it. And if consumers stop spending, either something has to take up the slack...or the economy goes into recession.

Bill Bonner
The Daily Reckoning Australia

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