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Fed: Housing Dents Growth Which Is Like, A Major Drag

[Been a little light on Matrix this week because I released on 3Q 06 market report. Back on track next week.]

Jonathan

Source: WSJ

Fed Chair Bernanke gave a speech yesterday in Washington which was widely covered in the media and discussed in the article Housing Hurts, Bernanke Says [WaPo] [1]:

As you know, a substantial correction is going on in the housing market,” Bernanke said, using stronger language than he had in recent months, when he described the real estate cool-down as “orderly.” The process is one of the “major drags causing the economy to slow,” he said.

The housing market weakened throughout the summer halving GDP from the first to the third quarters this year. He was unable to speculate how much weaker the housing market will get but that weaker housing hasn’t damaged the economy but will shave about a percent off of GDP from where it would have been, as discussed in the the article Bernanke Expects Housing Slide To Rein In Second-Half Growth [WSJ] [2].

…the housing sector is undergoing a “substantial correction” that will likely shave about “a percentage point off growth in the second half of the year” from what it would otherwise have been “and probably something going into next year as well,”

Weaker economic conditions have been responsible for lower mortgage rates to date and the Fed chair sees further economic weakening into 2007.

Source: WSJ

Whats been surprising has been the continued strength of consumer spending. Business was supposed to take over the consumers drive of the consumption based economy, but that hasn’t fully been realized. Consumers got religion this summer to keep spending [BW] [3] despite less equity in their homes or greater costs associated with tapping it.

The consumer theory was this: [WSJ] [4].

So far, however, only half of that equation is panning out: Americans aren’t using their houses like ATMs as much as they once did. Even so, their willingness to spend hasn’t suffered, though economists don’t agree on why.

The theory is that average incomes are way up this year, about 8%, gasoline prices dropped, mortgage rates dropped, corporate profits are up and exports increased.

Another explanation is that the role of home equity and its importance was simply exagerated.

That makes more sense to me, in fact “housing” and “exageration” seem to go hand in hand.