Thursday, February 09, 2006

Housing and its impact on consumption

I'm always happy to see an interview with Jeremy Grantham and his appearance in the most recent issue of Barron's (Feb 6) was no exception. Grantham spent part of the interview, for those who haven't read it, discussing the housing market and its current role in our national economy.

Wary of the overall trend in housing prices, he notes that a downturn could lead to a noticeable slowdown in consumer spending (which currently makes up 70% of GDP). Mr. Grantham feels that a drop in home prices could be the largest negative impact on consumption, outweighing even high oil prices. As he puts it: "Housing has been the easy way to get money". Lofty home values have renewed the "wealth effect" for Americans in recent years, but much of the money extracted from home equity loans has already been spent or put into savings.

Grantham's comments echo the sentiments expressed recently by Richard Russell of the Dow Theory Letter.