US Spending on Housing Declines Most in 26 Years

January 30, 2008 - U.S. spending on housing fell in the fourth quarter by the most in 26 years as the residential real estate slump started to curtail consumer spending.

Residential investment, the money spent on construction, renovation and broker fees associated with sales, dropped 24 percent in the period, the biggest decline since the fourth quarter of 1981, according to the U.S. Department of Commerce.

“The tentacles of the housing recession which began in 2006 are slowly but surely starting to strangle the rest of the economy,” said Paul Kasriel, chief economist for Northern Trust Corp. in Chicago. “With the decline in home equity we’ll be seeing less equity extraction to fund consumer spending.”

As potential buyers waited for home prices to fall farther, the amount of cash they borrowed based on the equity in their homes declined by half since March 2006, according to the Federal Reserve. That’s cut into the funds consumers have to spend and put a dent in the U.S. economy, Kasriel said.

U.S. median home prices rose 50 percent between October 2001 and October 2005, allowing homeowners to easily refinance their mortgages with new loans that would pay them additional cash based on the climbing home values. Borrowers took $1.26 trillion in cash out of their mortgages in the first quarter of 2006, the most in 13 years, according to the Fed. That number declined to $580.4 billion in the third quarter of 2007, the Fed said.

Consumer spending, which accounts for more than two-thirds of the economy, grew at a less-than-forecast 2 percent pace from October to December. Spending increased 2.9 percent for all of 2007, the least in four years.

Home Prices Fall

The drop in residential investment shaved 1.2 percentage points off U.S. gross domestic product growth, the Commerce Department said.

Home prices in 20 metropolitan areas fell 7.7 percent in November after dropping 6.1 percent in October, according to the S&P/Case-Shiller price index released Tuesday. It was the 11th month in a row of decline and the biggest since the index was started in 2000.

The number of unsold new homes hit a 26-year high in the fourth quarter, the Census Bureau said. Homebuilders started construction on the fewest number of new homes since 1981, according to the Commerce Department.

Residential investment declined for the eighth consecutive quarter after four years of gains. Investment fell 21 percent in the third quarter of 2007.

Gross domestic product increased at an annual rate of 0.6 percent, down from 4.9 percent in the prior three months, the Commerce Department said today in Washington. The pace of growth was half that forecast in a Bloomberg News survey and the slowest since the first quarter of last year.

U.S. Spending on Housing Declines Most in 26 Years
By Bob Ivry | Bloomberg