Econ Experts...your input please.

[Zkribbler]

The housing market is starting to cool off. I've heard that in a few places like San Diego, they've even had downturns. Even assuming that the majority of the housing market turns down, I know there won't be a crash a la the dot.com market, because the illiquidity of residential real estate would limit any downturn to a slow decline.

BUT, much of the spending in the consumer market comes out of home equity loans. If the market tops, equity will no longer grow, and the source of these loans will vanish. What will happen to consumer spending then??

Are we looking at a recession in 2007- 2008?

[Thrawn05]

Re: Econ Experts...your input please.

Originally posted by Zkribbler
The housing market is starting to cool off. I've heard that in a few places like San Diego, they've even had downturns. Even assuming that the majority of the housing market turns down, I know there won't be a crash a la the dot.com market, because the illiquidity of residential real estate would limit any downturn to a slow decline.

BUT, much of the spending in the consumer market comes out of home equity loans. If the market tops, equity will no longer grow, and the source of these loans will vanish. What will happen to consumer spending then??

Are we looking at a recession in 2007- 2008?

Well, where I am the houseing pricing is going up real fast, but not because of inflation or anything, but because we are going to get a big casino up here in PA and New Yokers are expected to move in in droves. The Poconos are expected to kill Atlantic City.

I don't see a recession, but I don't see a "We''re in the Money" furture either. Just my opinion.

[DanS]

Re: Econ Experts...your input please.

Originally posted by Zkribbler
The housing market is starting to cool off. I've heard that in a few places like San Diego, they've even had downturns. Even assuming that the majority of the housing market turns down, I know there won't be a crash a la the dot.com market, because the illiquidity of residential real estate would limit any downturn to a slow decline.

BUT, much of the spending in the consumer market comes out of home equity loans. If the market tops, equity will no longer grow, and the source of these loans will vanish. What will happen to consumer spending then??

Are we looking at a recession in 2007- 2008?

I'm no expert, but note that corporate profits as a percentage of the economy are at recent historic highs and therefore increased corporate spending can compensate at least somewhat for flat consumer spending. In the coming months, you might hear talk about the consumer "passing the spending baton" to business, for instance.

Here's a chart I put together in April that plots corporate profits as a percentage of the economy. For 2005, corporate profits probably will have been even slightly higher than 2004.

[Colonâ„¢]

Re: Econ Experts...your input please.

Originally posted by Zkribbler
BUT, much of the spending in the consumer market comes out of home equity loans. If the market tops, equity will no longer grow, and the source of these loans will vanish. What will happen to consumer spending then??

Are we looking at a recession in 2007- 2008?

It may equally cool. It has been a long-standing concern of many analysts.

[Kidlicious]

Re: Re: Econ Experts...your input please.

Originally posted by DanS


I'm no expert, but note that corporate profits as a percentage of the economy are at recent historic highs and therefore increased corporate spending can compensate at least somewhat for flat consumer spending.

Consumer spending is much larger than corporate spending. I don't think corporate spending ever drives economic growth.

That doesn't mean that I think there's going to be a recession. Right now it seems like consumers will keep spending no matter what the circumstance. Some day that will probably change, but I don't know what it will take.

[Tingkai]

Re: Econ Experts...your input please.

Originally posted by Zkribbler
The housing market is starting to cool off. I've heard that in a few places like San Diego, they've even had downturns. Even assuming that the majority of the housing market turns down, I know there won't be a crash a la the dot.com market, because the illiquidity of residential real estate would limit any downturn to a slow decline.

BUT, much of the spending in the consumer market comes out of home equity loans. If the market tops, equity will no longer grow, and the source of these loans will vanish. What will happen to consumer spending then??

Are we looking at a recession in 2007- 2008?

I'd question your statement that much of the spending in the consumer market comes out of home equity loans.

How exactly do you come to that conclusion?

What do you mean by "much of the spending"? How much do you think much is?

[Zkribbler]

Don't ask me questions that call for an intelligent answer. It just ain't gonna happen.

[PLATO]

The simple answer to the question of weather or not the "cooling" of the housing market will cause a recession is "No".

The bulk of mortgage refinance lending is for debt consolidation. A large segment is for strictly cash out, but much of this segment is for improvement to the real property.

A very tiny portion of people may borrow against their house just to spend the money, but that is highly unusual. Big ticket items (which are one of the staples of mortgage sales) have not really been a factor in the recent refinance boom. Short term interest rates being at or below long term rates have driven the consumer to finance these items independently.

Furthermore, the recent changes in credit card payment practices have driven more homeowners into refinancing due to the stress on the monthly budget that these changes have caused.

Now, wrt the "cooling" of the housing market. The truth is that new home starts are still extremely high in comparison to historical standards. They are down from last year for sure, but they are still very elevated. With rates stabalizing well below the last 40 year average, this segment of the market should continue to do reasonably well.

Now, California is an interesting case in itself. The astronomic expansion of property values in that area could not possibly have been sustained. I received an appraisal on a house in Napa about 18 months ago where the appraiser stated that property values were increasing at 8% per month!. While all of California certainly didn't see these types of appreciation, the state was remarkably above national appreciation rates. The return to a more "normal" appreciation rate is actually a good thing. Many Californians are now in a position where they could not possibly afford to buy their own home. Wages may begin to eat into these deficits and allow a new wave of untapped equity borrowing.

There are many, many factors involved. However, a stabilization of the appreciation rate and a slowing of new home construction will balance each other out in the supply/demand relationship.

Unless things change drastically for the worse in this market, there should be no effect on the economy due to it.

[Colonâ„¢]

It's not about housing starts, it's about housing prices and mortgage rates. As prices surged and rates were dropping, households were able to take on bigger mortgages without increasing debt service. Whether the motivation was to buy shiny new cars or not doesn't really matter, the effect on disposable income is the same (and we are talking about hundreds of billions a year).
When prices stop rising and rates stop dropping (a stabilisation of the levels is enough), the ability to refinance your mortgage on favourable terms disappears and subsequently the effect of propping up disposable incomes.

A similar effect has been playing out in Europe BTW.

[Colonâ„¢]

http://bea.gov/bea/newsrel/gdpnewsrelease.htm

Annualised GDP in 2005's last quarter: +1.1%
Consumer expenditures: +1.1%
Durable goods: -17.5%

Some coincidence this is happenings when the housing market lost its shine, isn't it?

[Kidlicious]

Originally posted by PLATO
The bulk of mortgage refinance lending is for debt consolidation. A large segment is for strictly cash out, but much of this segment is for improvement to the real property.

Either way a reduction in refinancing is going to be a drag on the economy.

[DanS]

Originally posted by Colonâ„¢

http://bea.gov/bea/newsrel/gdpnewsrelease.htm

Annualised GDP in 2005's last quarter: +1.1%
Consumer expenditures: +1.1%
Durable goods: -17.5%

Some coincidence this is happenings when the housing market lost its shine, isn't it?

Those numbers don't seem right. I expect some upward revisions.

[Colonâ„¢]

There may be an upward revision of equipment&software expenditures but the consumption figures correlate with the weak retail sales data that had been released prior to that.

[DanS]

In December, the American consumer spent like a champ, with upward revisions to the November number as well.

New unemployment claims in January have decreased substantially from previous averages, leading me to believe that at a minimum, the bottom didn't fall out from under the economy in Q4, unlike what the 1.1% figure indicates.

On the other hand, I expect the revision to be upward, but won't hazard an uninformed opinion about how large the revision will be.

[Colonâ„¢]

Well, yes and no. You're right that the headline figure ended up stronger than I thought, but it turns out GDP uses retail sales excl cars&parts, which do were pretty weak during the 4th quarter. They use unit automobile sales for the remainder of the calculations, and those were weak as well.