Yesterday’s WSJ had a good article on that exact subject:
"As home sales start to slow and the inventory of unsold homes rises, some economists are warning that home-price appreciation will slow or prices will possibly even decline next year. And that, they say, will lead to a slowdown in consumer spending that could start as soon as the holiday season ends.
Leading the worrywarts are economists at Goldman Sachs Group Inc. For several years, they have been closely watching what the firm dubs MEW, which stands for mortgage-equity withdrawal. It is the cash people extract from their homes by drawing on home-equity loans, "cash out" mortgage refinancing, or capital-gains earnings from real-estate sales…
Jan Hatzius, a Goldman Sachs economist, estimates Americans will withdraw $834 billion from residential real estate this year. That will fall next year, he says, to $758 billion and to $645 billion in 2007. "As households’ cash flow goes down," Mr. Hatzius says, "spending weakens." That, in turn, will reduce economic growth.
Equity withdrawal isn’t the only way that housing is supporting the economy. According to Moody’s Economy.com, the real-estate industry is responsible for creating 1.1 million of the two million net jobs that the nation added in the five years that ended in October. Those jobs include positions for land surveyors, general contractors, loan officers and building-material retail workers."
Note that the ugly part of the accompanying chart (via Goldman Sachs) are projections, and not actual declines:
MEW= Moprtgage Equity Withdrawals
A few other data points on this:
A study (supposedly co-authored by Fed Chair Alan Greenspan) estimated that "Americans withdrew $600 billion in equity from their homes in 2004, or 7% of their disposable income." Greenie’s study estimated "consumers spend about 51% of the cash they extract." Goldman’s estimates were that consumers spend ~68% of the cash they extract through home-equity loans and refinancing (most of the rest is used to pay down credit-card debt or invest).
WSJ: "In other words, Goldman believes that consumer spending is even more closely tied to home equity than does the Fed. If Goldman is correct, that means the housing slowdown will have a bigger negative impact on spending and the economy than commonly thought."
Real-Estate Boom Soon May Sputter As an Engine of Retail Sales
The Wall Street Journal, November 28, 2005; Page A2
Unsold house inventory highest since April 1986
BY TAMI LUHBY
Newsday, November 29, 2005