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, â€œjust â€™cause I didnâ€™t like the color.â€ 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.
â€œWe used to go out to eat three or four nights a week,â€ Mr. Whittey said. â€œNow, we donâ€™t go out at all.â€