The Sky Is Falling: The Graph

A Forbes magazine piece presents the bullish and bearish perspectives on what will happen to the economy when the equity-tapping refinancing trend comes to terms with a cooling national housing market.

The graph at the bottom of the piece shows the trend in equity-tapping against the trend in personal savings for American consumers. It’s not pretty.

Here’s the writer, Bernard Condon:

…in the bearish view, all those people who treat their homes like a bank, using money they borrowed against rising home values to buy iPods or take vacations or eat out, will be crimped if values don’t keep rising. That could ping the economy hard, given that consumer spending accounts for 70% of gross domestic product.

The economist Condon cites for that side is Jan Hatzius from Goldman Sachs. His view:

He cites a recent Federal Reserve survey that suggests people drawing cash from their homes do indeed spend about half on home improvement and consumer goods. A drying-up of this money over the next several quarters, then, would have an effect similar to a cut in wages.

On the other, bullish side is economist Dean Maki, of Barclays Capital:

Maki says consumers act prudently, putting most of the cash extracted from homes into stocks or bonds or paying off credit card debt. He points out that consumer spending growth has held steady through the home refinancing booms and busts. In this he is in accord with mainstream economic thinking, famously articulated by Nobel Prize winners Franco Modigliani and Milton Friedman, that people spend newfound wealth in disciplined increments so it lasts a lifetime.

Here’s Condon again:

You would think, with all the data available, the economists would have settled this one by now. But the practice of extracting cash from homes took off only a decade ago. So the Fed is to a large degree sailing in uncharted waters. So are investors whose growth forecasts presume that consumers will keep consuming.

– KELLY BENNETT