Economist Jim Glassman of JPMorgan Chase puts the kibosh on a housing-led recession in a new piece of analysis. Here are some of the juicy bits:
Sometimes homeowners are portrayed as living on the equity in their homes, treating the equity in their houses as an ATM.
1) This characterization confuses the typical, and rational, response by consumers to changes in their wealth, realized or unrealized. Equity extraction is merely one way consumers can adjust their spending to wealth gains. They can also choose to save less (spend more).
2) Many homeowners may view the building of capital gains in their homes as a down payment on a future purchase. If so, they could view a decline in the value of their homes to be a wash, if prices in other areas they would choose to live fall too. In that case, a decline in house prices would not lead to a reduction in consumer spending.
3) Income fundamentals trump everything for consumers. At the end of the day, the shape of consumer trends will be shaped by trends in real disposable personal income. ...Wage and salary gains have been steady and solid in recent years, since 2003, when the economy's recovery took hold. For example, real wages and salaries have been growing almost 3 percent annually for four consecutive years, as the economy has been recovering from the slump early in the decade.
4) Consumers are likely to face a challenging year in 2008. Nonetheless, real consumer spending is forecast to only moderate to 2 percent pace over the four quarters of 2008, down from 2.6 percent in 2007. This would represent the slowest year for consumers since 2002, but likely would not trigger a recession.