Overseas Slowdown In Housing Shows Impact On Consumption

BY KIRK SHINKLE

INVESTOR'S BUSINESS DAILY

Posted 9/26/2005

Euphoric U.S. homeowners reveling in record real estate windfalls
might want to look across the Atlantic before their next trip to the
mall.

The view might stiffen a few upper lips.

In the U.K., the housing bubble burst last year, and despite a soft landing for home prices, the fallout left many Brits feeling a bit
poorer.

U.K. consumption has stalled, savings have risen and economic growth has slowed.

The same thing could happen here with even more dire consequences since U.S. consumers remain one of the biggest drivers of the world economy.

David Rosenberg, Merrill Lynch's chief North American economist, points to both the U.K. and Australia as harbingers of what a housing slowdown might do to consumer spending.

In the U.K., home price growth peaked last summer, with July prices rising a whopping 20% year over year.

The Brits treated the windfall as an excuse to spend freely, but as
the U.K. market cooled, a slowdown followed.

Home-grown Slowdown

Home appreciation fell to just 2.3% in August as GDP growth weakened from 3.7% to 2.1%.

British retail sales grew at a 6.2% clip in May 2004, but slowed to just 0.8% last month, despite deep end-of-summer discounts.

U.K. shoppers are feeling less wealthy than they did just a year ago.

A recent rate cut by the Bank of England this summer has failed to
spur consumer spending. Shares of U.K. retailers are lagging the rest
of the market.

And that's in a housing market where prices are going up less
quickly — not falling, as they could in a host of overheated local
U.S. markets.

In Australia, the story is similar.

Home price gains peaked at 19% in Dec. 2003. Now prices are flat.

Over that time, Aussie GDP growth has fallen from 4.5% to 1.9% year
over year.

Jobs in both countries are relatively plentiful, but spending growth
keeps shrinking.

Savings have increased in both the U.K. and Australia, another sign
that shoppers are wary.

By contrast, U.S. savings are getting worse. They've turned negative,
falling to -0.6% as Americans tap into wealth above and beyond their
incomes.

And why shouldn't they? Existing home sales rose 2% to an annualized
7.29 million in August, second only to June's 7.35 million. The
median prices swelled 15.8% vs. a year earlier, the best since 1979.

New home prices have been retreating in recent months, though it's
not clear why.

If housing does cool off, the impact won't be uniform. The largest
gains have been in coastal areas like New York, California and Florida.

They will likely be the first to fall, experts warn.

Homeowners in the Midwest face fewer worries, since their homes have
risen less in value.

In the worst-case scenario, where prices drop substantially, Standard
& Poor's says we still wouldn't see a recession, with estimates for
2006 GDP growth at 1.2%, provided the Federal Reserve cuts interest
rates if growth indeed slows.

So how will U.S. spending fare?

If price growth only moderates, consumers will be OK. But a 20% drop
in U.S. home prices over two years — 30% in hot markets, 10% in
cooler ones — would slash more than $2 trillion from household
wealth, Standard & Poor's said. That would cut $100 billion from
household spending.

That's still less than 1% of GDP, but gloomier predictions note that
housing is the final pillar supporting consumer spending.

Americans already face soaring energy prices and pay raises that
aren't keeping up with inflation.

Several retailers have warned of weaker results in recent weeks,
sending shares lower as investors fear worse news to come. But some
leaders, like women's clothier Chico's FAS, continue to shine.

S&P said credit card charge offs, an early gauge of consumer woes,
were below 2002 levels as of the first quarter.

But chief economist David Wyss pointed to an American Community
Survey in July that saw more households reporting they're "severely
burdened" by housing costs.

Housing woes don't exist in a vacuum. If a housing slowdown, a hike
in gas prices and damage from Hurricanes Katrina and Rita each slices
a percentage point off GDP growth, the U.S. is flirting with recession.

Mix that with the huge amount of consumer debt pulled out of homes
via equity loans and refinancing in recent years, and the next
several quarters look decidedly less rosy.

Federal Reserve data show households withdrew $317 billion in home
equity in 2004. That's 3.7% of last year's disposable income. As the
home-as-ATM phenomenon subsides, a huge source of cash for spending
will dry up.

The wild card, economists said, will be the Federal Reserve.

Alan Greenspan's final months as Fed chairman could prove
challenging. Consumers — and investors — might welcome a pause in
rate hikes, but inflationary pressures — especially in energy —
can't be ignored.

Greenspan has spoken out on housing, though on Monday he moderated
his fears, saying homeowners can "absorb" a drop in prices.

But a housing slowdown would likely curb personal spending, he added.