Will Housing Slowdown Have Dual Effect?

The housing slowdown may affect economic growth not only by curtailing construction, but also by slowing the home price appreciation that has helped fuel consumer spending, according to a publication of the Federal Reserve Bank of Dallas.Writing in the November issue of the bank's Economic Letter, John V. Duca, vice president and senior economist at the Dallas Fed, cites "limited" evidence that the strong pace of mortgage equity withdrawals in recent years may have boosted consumption levels by 1%-3%. "A slowing of home price appreciation into the low single digits might shave 1 to 2 percentage points off consumption growth and 0.75 to 1.5 percentage points from GDP growth for a few years," Mr. Duca says. He stressed that the effect of home prices on consumption is uncertain because it is unclear how much price appreciation will slow; to what extent the slowing would reduce mortgage equity withdrawals; and how much such a reduction would affect consumer spending. The bank can be found online at http://www.dallasfed.org.