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Thursday, July 19, 2007

Bernanke: Housing ATM Overblown

by Calculated Risk on 7/19/2007 03:04:00 PM

From Greg Ip at the WSJ economics blog: Bernanke Rains on Theory of Houses as ATMs

Fed Chairman Ben Bernanke said the role of home equity as source of purchasing power isn’t significant, a clear break from the views of Alan Greenspan and many economists.
Mr. Bernanke ...: “Our sense — and this so far seems to be borne out by the data — is that consumers respond to changes in the value of their home essentially because there’s a change in their wealth, not because there’s a change in their access to liquid assets.”
Bernanke has been wrong about everything else related to housing, but maybe he'll be correct here. However, clearly Bernanke's view is "not borne out by the data" - at least not yet. Based on most research on MEW, the impact of declining MEW, if any, would probably hit consumption in the 2nd half of '07. We already know there was a sharp slowdown in Q2 PCE growth, but that might be related to higher gas prices and not declining MEW.
Mr. Bernanke went on to reiterate it’s the price of homes, not MEW or financial contagion that represents the biggest risk of spillover from the housing slump. “House prices, nationally speaking, have not declined,” he said. “They’ve only risen more slowly, and so we have not yet seen anything except in a few local areas akin to a decline in house prices.” If they do decline, he said a hit to consumer spending could be expected on the order of “4 cents and 9 cents on the dollar” of lost home wealth.
Although prices have increased slightly according to OFHEO, prices have fallen nationwide by several other measures (NAR, FHFB):
The FHFB reported the decline in the average price was $501, or 0.16 percent, from $306,759 in October 2005 to $306,258 in October 2006. This is the first decline in the MIRS since 1992-93.
And prices have most likely fallen more since October of last year.