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July 19, 2002

Forget Dow, Watch for Housing Meltdown

If you want to have nightmares about the economy, don't watch the Dow. The real threat to average family wealth and therefore consumer spending is the housing market. And Morgan Stanley analyst Stephen Roach has a harsh assessment of the housing market. The value of household real estate assets is 159% of disposable personal income and the recent rounds of mortgage financing have been key to extending consumer spending through the recession. Roach cites Federal Reserve estimates that homeowners have borrowed hundreds of billions of dollars against their home value in the last few years.

And here is the dark side according to Roach:

total household sector debt now stands at a record 75% of nominal GDP, ten percentage points higher than it was at the onset of the last cyclical recovery in the early 1990s. Nor has the burden of servicing this debt been tempered by 40-year lows in short-term interest rates. Household sector debt service as a share of disposable personal income still stood at 14.1% in 1Q02 -- down only slightly from the record 14.3% reading hit in the final period of 2001. The impact of low interest rates has obviously been offset by the massive expansion of outstanding household indebtedness.

Roach cites strong evidence that housing prices are ready to fall, evidence supported by other articles at ABCnews.com. Other publications expect not a crash but just slowing or stagnant prices, still dangerous in an economy where consumer spending has been driven by housing gains.

Posted by Nathan at July 19, 2002 07:17 PM

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