Thursday, January 29, 2009

In 2008, adverse housing wealth effects killed consumption

This recession is especially rough because of the record retrenchment in consumer spending. High gas prices, the financial crisis, and a dismal housing market pushed consumers to the brink. The current cycle is set to be the worst consumer spending cycle since 1950.
The chart illustrates annual growth in quarterly GDP and private consumer spending (the C out of Y = C + I + G + NX) spanning the years 1947:2 to 2009:1 (forecast). The forecast in 2008:4 and 2009:1 is based on Wachovia's published forecast and consistent (if not slightly more benign than) with consensus expectations of the BEA's GDP release on Friday. Consumption is expected to reach -2.0% annual growth by 2009:1 (-1.5% in 2008:4), it's biggest decline since 1951:3.

Consumers have been shocked with high gas prices before and survived; annual consumption growth hit a low of -1.0% in the early 1980's. However, the quick evaporation of housing equity in the last year took households by surprise.

According to the S&P Case-Shiller composite-20 monthly house price index, national home values fell 16.4% in 2008 alone through November (just eleven months). That is 6.4% more than the decline from the housing price peak in July 2006 through the end of 2007 (10.4%).

The chart illustrates the regional loss in home values over the same two periods: eleven months of 2008 through November, and from the peak in activity through December 2007. Across most regions, home values fell sharply in 2008 (only through November) relative to the previous period declines.
  • Phoenix saw the biggest declines in 2008, -30%, and a relatively mild decline through 2007, -17%.
  • Las Vegas, Miami, San Francisco, San Diego, and Los Angeles saw a similarly devastating slash in home values in the eleven months of 2008.
  • Portland saw a sharp decline in the eleven months of 2008, -11%, compared to the previous 16 months, -2%.
  • Dallas, Denver, Cleveland, and Boston are the only cities to see smaller declines in 2008 relative to the previous period.
The qualitative evidence is incontrovertible: this cycle is marked by serious adverse real estate wealth effects. On average (as measured by the Case-Shiller composite 20 index), home values have been declining since July 2006 - over two years - but households saw their biggest declines in home equity in just eleven months of 2008. The associated pull-back by consumers will set records, as households retrench amid record housing equity losses.

Rebecca Wilder


  1. As a general rule isn't the housing market the first sector to lead the economy out of recessions?

  2. Don't know if that is a general rule - I understand that the 2001 recession was not associated with a housing cycle - but that is a good bet for this recession!


  3. I found some old info but an analysis I like on housing boom-bust cycles:

  4. Accrued Interest:

    "And it will take a SLOWDOWN IN FORECLOSURES for housing prices to bottom. I suspect it will be government intervention that is the catalyst for this. We've already seen the government move to lower mortgage rates, which really should give us pretty good affordability. And while part of the initial problem with housing was over-building, but that ship has sailed. Housing starts have plummeted, and now all starts are pretty much multi-family or made to order.

    Anyway, you need demand to outstrip supply in order for prices to start rising. As long as foreclosures are rising, that MEANS SUPPLY IS RISING. Demand is going to be tepid until the employment picture improves. Rising supply and unchanged demand equals falling prices.

  5. Millions of Americans exist to create households and likely dream of doing so -- thus demand exists, massive demand.

    What does not exist are Bid Offers because those same millions like cash flow that can sustain both living expenses (food, gasoline, electric power) and debt service (mortgage, credit card, car loan).

    While Wealth Destruction cannot happen unless bombs fall from skies thus destroying things physically, Worth Destruction can.

    Persons overpaid to have houses built and the existing houses are worth much less than what others wish them be.

    Attempting to keep up house prices shall only take away from the worth of other things and stop investors and other risk-takers from putting up cash for the making of new things, which would become prized more, hence worth more.

    Instead, the economy and thus the full life experience of most Americans, everyday street-level authentic Americans, shall fall short, robbing them of a lifetime of maximization.

    This kind of permanent lifetime reduction of the best living happens always under collectivist systems such as the U.S. where those of the political and financial class -- the elites -- can use the force of government behind them to confiscate through rules changes and changes to the worth of the most important commodity -- money.

  6. *like = lack


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