Analysts Debate Link Between Home Prices, Consumer Spending
John Ryding, chief U.S. economist at Bear Stearns, told CNBC’s “Squawk Box” that he believes many analysts have overstated the effect of declining home prices on consumer spending.
“Wealth is still rising,” Ryding said. “It’s not just homeowners’ wealth -– it’s equity market wealth. Consumer wealth levels in the fourth quarter of last year set a record high in real dollar terms. So, I think the impact (of falling housing prices) on spending has been somewhat overblown.”
He said income growth is the key factor in consumer spending and incomes continue to rise. Tapping home equity is a “financing vehicle” for consumer spending, but doesn’t determine it.
“Last year, equity extraction –- taking money out of your home –- fell $240 billion, but consumer spending picked up,” Ryding said. “So, clearly, there’s not a very strong link.”
But Thomas Lawler, founder of Lawler Economic and Housing consulting, took a more downbeat view of consumer spending in a sagging housing market.
“Consumer spending has outpaced income for quite a bit, and at the same time home prices have outstripped income,” Lawler said. “There’s absolutely a relationship. Home prices, which nationally started to fall in the second half of last year and are almost certain to decline this year, are going to curtail consumer spending –- no doubt about it.”
He said a key factor is not just how much money consumers take out of their homes, but how much consumers think their homes will be worth in the immediate future.
“A recent survey suggested that consumers don’t expect home prices to go up at all over the next year,” Lawler said. “Given what’s going on in the mortgage market, which will curtail housing demand this year by at least 5% and maybe 10%, it’s almost certain that home prices are going to go down nationally, and in some regions, they’re going to go down a lot.”