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Wednesday, March 07, 2007

Mortgage Lending Standards vs. Personal Consumption

by Calculated Risk on 3/07/2007 01:03:00 PM

The following graph shows the quarterly "Net Percentage of Domestic Respondents Loosening Standards for Mortgages to Individuals" from the Federal Reserve vs. the year-over-year change in real Personal consumption expenditures (hat tip: John).

Source: Federal Reserve, Figure 2, Panel 3 (inverted), and BEA.

Click on graph for larger image.

Changes in real PCE have tracked changes in lending standards fairly well since 1990 (start of available data from the Fed). The one period of divergence, from 1998 to 2000, might be related to the stock market bubble.

At the start of the year, I proposed three strikes from the housing bust: a sector-specific credit crunch leading to a further decline in the housing market, significant residential construction job losses, and less consumption due to declining homeowner equity extraction.

This graph is related to the third strike, and suggests that tighter lending standards might lead to lower YoY changes in consumption in the coming quarters.

Note: The correlation used data by quarter since Q3 1990. There are 14 degrees of freedom (since some of the YoY changes are not independent). We can be 99% confident that the YoY changes in real PCE are positively correlated with loosening mortgage lending standards.