Tuesday, 09 October 2018 10:00

Why the US Housing Slump Could be a Major Problem

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(New York)

The US economy is on fire. Growth is strong, consumer confidence is high, and (somewhat worryingly) the Fed is almost giddy. However, even the greatest optimists will have a gnawing fear caused by the US housing market, which has been in decline for the past handful of months. The huge rising gap between home prices and wages has finally stalled the market, all while rates move higher and dampen demand. The big risk that no one is pointing out, though, is how that trouble in housing will flow through to the broader economy. It will likely not be via mass mortgage defaults and foreclosures like last time, but rather through a severe tightening of purse strings. The big rise in home prices means Americans disproportionately hold their wealth in home values, so a decline will cause a major loss of wealth, and thus spending, seizing up the economy.

FINSUM: In 1978 a 20% decline in home prices would have caused a 1% decline in aggregate income. Today, the same decline would cause a five percent drop, or about $600 bn of lost equity. Housing may still lead the economy downward.

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