For immediate release: November 29, 2006
Impact of U.S. Housing Slowdown on the Economy Examined in Dallas Fed’s Economic Letter
DALLAS—A housing demand slowdown could affect overall economic growth not only by curtailing construction but also by slowing home price appreciation which, has fueled consumer spending, according to the November issue of the Federal Reserve Bank of Dallas Economic Letter.
In “Making Sense of the U.S. Housing Slowdown,” vice president and senior economist John V. Duca reports that changing mortgage practices have enabled families to extract wealth more easily from their homes as prices have appreciated. Americans have made these mortgage equity withdrawals, or MEW, via home-equity loans, cash-out mortgage refinancing, and by making smaller down payments.
He points to limited evidence indicating that the strong pace of MEW in recent years may have boosted consumption levels by 1 to 3 percent. “A slowing of home price appreciation into the low single digits might shave 1 to 2 percentage points off consumption growth and 0.75 to 1.5 percentage points from GDP growth for a few years,” he writes.
Nevertheless, the author emphasizes, the impact of home prices on consumption is uncertain because it is unclear how much price appreciation will slow, the extent to which deceleration would slow MEW activity and how much a decrease in MEW would affect consumer spending.
Duca stresses that the impact of housing should be viewed along with that of other economic sectors in assessing overall economic conditions.
The November 2006 issue of Economic Letter can be found at www.dallasfed.org.
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