US housing depression, wealth erosion and consumption recession

This linked economic review by Van Hoisington and Lacy Hunt (shared by John Mauldin) makes for another very sobering analysis of the outlook for the US economy. Some of the choice passages include:

  • In the last twelve months, real U.S. imports of goods rose a minuscule 0.5 %, down from the 8.5% growth rate in the twelve months ended August 2006, reflecting the slowdown in consumer spending
  • home equity cash outs, as tabulated by Freddie Mac, totaled $151 billion, or an amount equal to 50% of the rise in total consumer spending (PCE) during the initial two quarters of 2007.
  • over the past 5 1/2 years, $1.1 trillion in equity has been extracted from homes. This represents 46% of the increase in total consumer spending over the same period (Table 2). The tightening of credit standards and declining home prices will virtually guarantee that $1.1 trillion will not be extracted in the next few years. Consequently, slower consumer outlay growth can be expected for an extended period.
  • mortgage debt relative to disposable personal income surged from 64.7% at the end of 1999 to 100.2% at the end of the second quarter of this year. This 35.5% rise since was greater than the rise over the 43 years leading up to 1999.
  • $800 billion of adjustable rate mortgages will reset between October 2007 and December 2008, with the peak in the first and second quarters of 2008. Those will include the home buyers who bought at the top of the housing market in 2006, many of whom paid zero down and received teaser mortgage rates of either 0% or something very close. Defaults on these resets are likely to be quite large
  • a 20% decline in home prices would result in a $4.2 trillion wealth loss and a $210 billion reduction in consumer spending.

And a couple of charts:

The good news is that the drop in consumer demand is likely to take pressure off inflation. But, all in all, the outlook for the US economy for the next couple of years is not good.

Food prices rising - eat less meat.
September US new home sales down 23%

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