I don’t see how any intelligent, observant, intellectually honest person can claim that there has been zero impact on consumer spending by the giant spree of HELOCs and Refis over the past 5 years. Its simply beyond my capacity to imagine that opaqueness.
The most recent addition to the literature on this comes from an update of the original Greenspan/Kennedy analysis. The WSJ reports:
"In a paper released by the Fed yesterday, Mr.
Greenspan and Fed economist James Kennedy estimated that home equity
served as a growing source of funds for American consumers from the
early 1990s to 2005, when it financed close to 4% of total
personal-consumption expenditures. In the latter part of 2006, however,
it appeared to finance less spending as the housing market began to
Messrs. Greenspan and Kennedy didn’t offer any
conclusions about whether home equity actually prompted more spending
than would have otherwise been the case. Private-sector estimates on
that subject vary widely. Some economists think the wealth the nation’s
consumers have extracted from their homes in recent years had a
pronounced impact on their spending, while others think it played a
Between 1991 and 2000, consumers used cash withdrawn
from the equity in their homes to finance just 0.6% of overall
spending. That share rose to nearly 1.75% in 2005, according to the
Greenspan-Kennedy paper. When the indirect effect of nonmortgage debt
repayments, mostly credit cards, is included the effect rises from 1.1%
of total consumer spending between 1991 and 2000 to almost 3% between
2001 and 2005.
As the WSJ noted, we can argue about how big the impact was — a whole
lot, a middling amount, more for some economic strata then others. But
to claim that all the Helocs and Refis and Cash withdrawals had no additional impact on spending or the economy is simply ignoring reality.
The impact has been felt at the margins across consumer spending. I am no GM defender, but these comments from auto legend Bob Lutz appear fairly circumspect to me:
GM Vice Chairman Bob Lutz, who was in Louisville, Kentucky to
attend an automotive industry conference, said he did not know how GM’s
sales had performed in April, but said he expected the whole automotive
sector would feel the impact of the stress on the housing finance
"The market as a whole has been a little weakish. That has come as
a result of the housing market problems and the mortgage industry
meltdown," Lutz told Reuters. "A lot of people are finding themselves
in a position of reduced affordability and that has had an impact, not
just on us, but across the industry."
That’s hardly blaming all their woes on the Housing sector.
Not only did the Housing boom lead to an increase in consumer spending here, it also did so abroad:
"The slowing U.S. housing market already has taken a
bite out of the U.S. economy. Now, the fallout is spreading to Latin
That’s because home construction is the principal
gateway industry for immigrants entering the U.S. labor market. Those
immigrants contribute the lion’s share of the estimated $50 billion in
cash sent annually from the U.S. to family members and others in
countries south of the border. That tide of cash appears to be ebbing.
Monthly remittances from the U.S. to Mexico have
dropped every month since their peak of $2.6 billion in May 2006 –
shortly before new-home construction in the U.S. plunged. In February
2007, the latest month for which data are available, remittances to
Mexico had slowed to $1.7 billion.
Mexico, Latin America’s remittance leader, may be a
leading indicator of a trend unfolding across the continent. In a
recent study of 15 Latin American economies tracked by BCP Securities
of Greenwich, Conn., all but three showed better than a 90% correlation
between the ebb and flow of U.S. housing starts and the swelling and
shrinkage of remittances as recorded by the nations’ central banks."
The impact on Latin America is not about MEW, but rather, is about the surge in jobs the Housing sector created.
Greenspan Sees Spending Link To Home Equity
WSJ, April 24, 2007; Page A2
Sources and Uses of Equity Extracted from Homes (PDF)
Alan Greenspan and James Kennedy
Finance and Economics Discussion Series (FEDS), 2007-20
Latin America Feels Pain of U.S. Housing Slump
WSJ, April 23, 2007; Page A2
GM’s Lutz says mortgage ‘meltdown’ hits auto sales
Reuters, Tue Apr 24, 2007 1:02AM EDT