A new Study out, plus a NYTimes article today, present the dilemma of the American economy:
Housing’s Impact on Wealth Accumulation,
Wealth Distribution and Consumer Spending 2004
Eric Belsky, Joint Center for Housing Studies of Harvard University
Joel Prakken, Macroeconomic Advisers, LLC,
housing remains the primary store of wealth
for most Americans. Home equity constitutes roughly one
fifth of total household net wealth. At last measure, over
two thirds of households owned a home but only about
half owned stocks or mutual funds containing stocks. And
fully six in ten homeowners had more home equity than
Wealth effects of real estate plainly ramp up to their long-run
effects much faster than the wealth effects resulting from
gains in corporate equities. The likely reason is the lower
volatility of home values than stock values. Households feel
more confident of gains in housing wealth and thus spend
more readily and quickly when they occur. This is consistent
with findings that the wealth effects arising from gains in
volatile technology stocks take longer to reach their long-run
impacts than wealth effects from other types of stocks
(Edison and Slok 2001).
Falling rates spark refinancings
and home sales. These in turn trigger a spurt of consumer
spending in the short run. Conversely, tightening can slow
home sales and reduce home equity borrowing. These in
turn quickly act as drags on consumer spending and slow
economic growth. Given that consumer spending amounts
to about two thirds of total economic activity, monetary
policy that contributes to it by stimulating short-term
spending in response to greater realized capital gains, higher
property values, and accelerated liquidation of home equity
can make the difference during periods of economic
weakness between a steep recession and a soft landing.
The Study is funded by a Realtors association, but the economics and math are good. Their basic argument resides in the last Quote, with the implication this stands as valuable economic policy. Several criticisms can be made:
1) Such manipulation of Interest rates propels Consumer Debt.
2) The boost to Consumer spending generated is almost universally fueled by Consumer Debt.
3) Such economic policy will incite Inflation in Housing far faster than the Consumer Price Index.
4) Consumers invariably choose Housing beyond their financially stable means.
5) Housing is such a huge component of total Capital accumulation, that it is one of the prime propellents of Inflation. This economic policy spurs Inflation by exciting Price rise in the Sector.
In Housing Sales, Frenzy Is Giving Way to Balance
By ROBERT D. HERSHEY Jr. Published: December 6, 2004
One reason for the cooling could be heavy recent speculative buying, with people acquiring houses in hopes of a quick profit without making improvements to the homes. Such purchases contributed to a 12.97 percent surge in average home prices from the third quarter of 2003 to the third quarter of 2004, the biggest four-quarter increase since 1979, when inflation began to rise at double-digit rates, according to the Office of Federal Housing Enterprise Oversight. That was almost five times the gain of other goods and services measured by the Consumer Price Index.
Current prices are at record levels in relation to average incomes, so higher interest rates would almost certainly make purchasing a home harder for prospective buyers. The low rates of recent years have helped buyers afford more expensive houses
Houses have appreciated 1.5 to 2 percentage points faster than the rise in the Consumer Price Index. With inflation at about 3 percent, the 7 percent advances in house prices in recent years are at least twice the norm.
Mortgage Bankers Association of America predicts the volume of mortgage refinancings will slide almost 43 percent next year, to $680 billion from an estimated $1.19 trillion in 2004
This Author opposed the Fed policy of lowering Interest rates shortly after George W. Bush took office. Not least in his rationale was knowledge of the above effects. Such economic policy always generates Inflation, and higher Interest rates always generates a deeper economic trough when the Bust comes, as Consumers are deeply in Consumer debt with higher and harder Repayment schedules to meet. Rebound economic growth becomes difficult, as lower Consumer spending comes from abnormal Repayment schedules and lower Employment rates. lgl