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Housing Issues Continuing Drag On Consumer Spending

ByBlog of HORAN Capital Advisors
Published 10/18/2013, 01:23 AM
Updated 07/09/2023, 06:31 AM
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A recent report by the Federal Reserve Bank of New York shows residential non performing loans (NPLs) at bank holding companies remain highly elevated. This is in contrast to the improvement seen in commercial NPLs have declined significantly.
Non-Performing Residential Real Estate Loans
Non-Performing Commercial Real Estate Loans
At issue is the impact higher residential NPLs are having on the individual consumer. Economists indicate the wealth effect that results from rising stock and real estate prices has a positive impact on consumer spending. Mark Zandi of Moody's Analytics recently stated, "an added dollar of housing wealth might produce 8 cents in extra spending, and an extra dollar of stock wealth, 3 cents. The overall effect was about 5 cents per dollar of new wealth, Zandi says. Now, 2 or 2.5 cents 'seems more likely to me.'"


It appears the elevated level of residential NPLs may be showing up in the continually declining rate of growth in personal consumption expenditures (PCE). The first chart below shows the year over year change in personal consumption expenditures and the second shows the same information, but using real PCE.
Personal Consumption Expenditures
Real Personal Consumption Expenditures
On top of a potentially struggling consumer sector that is not benefiting from the "wealth effect". The sticker shock associated with the health insurance premiums being realized on the health care exchanges is another headwind for growth in consumer spending. Since consumers account for 70% of GDP, the lack of wealth creation from real estate and fewer dollars to spend as a result of the increased cost of health care via the exchanges, it appears a slow growing economy is likely with us for the foreseeable future.

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