Academic journal article ABA Banking Journal

Apres le Deluge!

Academic journal article ABA Banking Journal

Apres le Deluge!

Article excerpt

THERE'S A SCARY SCENARIO making the rounds these days that goes something like this: The boom in house prices over the first half of this decade created trillions in real estate wealth, which Americans feverishly tapped to buy cars, big-screen TV's and other goods and services. But now that the housing bust has arrived, this scenario posits, falling prices will throw everything into reverse, causing a consumer retrenchment with adverse implications for the economy at large. While the basic story line has merit, it nonetheless exaggerates the risk, for a variety of reasons.

First, house prices have not fallen. While there have been occasional reports to that effect from the National Association of Realtors and the U.S. Commerce Department, each of these sources cites "median sales prices" which historically have overstated both price appreciation and decline. Now, for example, housing is relatively unaffordable, which causes there to be proportionately more sales of lower priced homes, which biases median sales price measures downward. A more accurate measure of price appreciation, from the Office of Federal Housing Enterprise Oversight, shows third-quarter house prices up 6% from one year ago, though slowing to just a 1.5% rate during the quarter. Prices may well decline going forward, but at this point declines are isolated, not generalized.

Second, while it is true that equity extractions from the real estate market have been huge in recent years, these extractions have not translated directly into consumer spending. According to the benchmark resource on this topic, Greenspan and Kennedy at the Federal Reserve, active withdrawals from the housing market (via cash-out refinances or home equity borrowing) amounted to a staggering $1. …

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