US homeowners feel the pain of lost equity.
There’s an article in todays New York Times about the way dropping home prices are affecting consumer spending - its an interesting look at the way the boom and bust cycle works on ‘positive feedback loops’ which aren’t always positive. When house prices are increasing people spend more money and will take on extra debt to buy more ‘investment’ property thereby driving high prices higher. When the peak has been hit this effect is reversed. Dropping house prices eliminate the ‘ATM effect’ of home equity withdrawals removing a large portion of discretionary spending from the economy. Less spending means less income thereby driving dropping house prices lower.
Mr. Whittey once seemed an unlikely member of that cohort. A sales manager at a flooring and tile company, he exudes the unflappable air of someone raised amid the easy money of the casino world. Until recently, he and his wife regularly embarked on shopping sprees of $1,000 and up.
He bought a 21-foot boat and two flat-screen televisions for their home. He sold his old truck and bought a new one, he said, “just ’cause I didn’t like the color.†Mr. Whittey could live in such fashion because his company was making good money and his house was appreciating.
But today, the value of his own home, which reached $500,000, has fallen and a separate investment property he bought seems likely to fetch far less than the $580,000 he owes the bank. His commissions have diminished, so his income is down. His neighbor recently fell behind on house payments, prompting the bank to foreclose. Anxiety reigns.
“We used to go out to eat three or four nights a week,†Mr. Whittey said. “Now, we don’t go out at all.â€
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November 8th, 2007 at 8:48 am
With so many urban hipsters living off credit cards and feeding mega-mortgages on little shoebox condos, even a slight economic downturn will have a big effect.
November 8th, 2007 at 9:17 am
I havn’t so far, but now I feel inclined to short various bank stocks that have not taken huge hits yet. US retail stocks should also start taking hits soon as well, considering consumer spending this holiday season should be way down. When they report there Christmas sales numbers and they fall way below expecetations, retail stocks will fall. I was thinking about shorting Citigroup over a week ago, but now that doesn’t seem like such a good idea considering how far its already fallen. So what are people shorting these days?
November 8th, 2007 at 10:04 am
November 8th, 2007 at 12:44 pm
The sad thing about Vancouver is you get that deep in debt just living a simple life in a simple condo. Many Vancouver FBs got just the hangover, no party.
November 8th, 2007 at 3:42 pm
Doing groceries at the same chain I normally go to, but in a different city, was an eye opener to how much this city’s costing me every month.
November 8th, 2007 at 7:57 pm
November 8th, 2007 at 8:08 pm
November 8th, 2007 at 8:24 pm
November 8th, 2007 at 8:33 pm
Don’t you just feel sorry for those poor bastards who can’t get fat anymore on the next generation.
November 8th, 2007 at 11:15 pm
November 9th, 2007 at 1:48 am
.. why am I not surprised
November 9th, 2007 at 8:21 am
November 9th, 2007 at 9:27 am
The Economic Consequences of Mr. Bush
“…the job of economic stimulation fell to the Federal Reserve Board, which stepped on the accelerator in a historically unprecedented way, driving interest rates down to 1 percent. In real terms, taking inflation into account, interest rates actually dropped to negative 2 percent. The predictable result was a consumer spending spree. Looked at another way, Bush’s own fiscal irresponsibility fostered irresponsibility in everyone else. Credit was shoveled out the door, and subprime mortgages were made available to anyone this side of life support. Credit-card debt mounted to a whopping $900 billion by the summer of 2007. “Qualified at birth” became the drunken slogan of the Bush era. American households took advantage of the low interest rates, signed up for new mortgages with “teaser” initial rates, and went to town on the proceeds.”
November 9th, 2007 at 10:35 am
November 9th, 2007 at 1:17 pm
For real, it was probably the river of cheap money that’s been flowing globally for the past few years. That’s starting to dry up and we’re seeing real estate price collapses everywhere as a consequence.
Not here of course, nothing bad can possibly happen here.