Historically, consumer credit has roughly tracked overall changes in house prices. In other words, the consumers’ ability to borrow — and then go out and spend — has been highly correlated to real estate changes (and hence, the importance of interest rates).

In the attached chart, courtesy of Michael Panzner at Rabo Securities, the year-on-year changes in the U.S. Office of Federal Housing Enterprise Oversight’s quarterly house price index is overlayed on a graph of consumer credit outstanding as a percentage of nominal GDP.

In a healthy environment, you see real (after inflation) wages rise, and consumer spending going higher along with that.

In a stimulus-driven environment like we’ve enjoyed for the past three years, instead of real wage growth, there’s been a lot of consumer borrowing propelling their spending.  I expect as the borrowing slows down, so too will the consumer spending.

I don’t see how to put a positive spin on that.

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click for larger graph

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Source: Mike Panzner, Rabo Securities

Category: Economy, Real Estate, Retail

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