The Condo-Based Economy Goes Nationwide

Submitted by Rich Toscano on December 12, 2005 - 11:22am

My friend Calculated Risk (that's his real name—his parents were hippie economists) has published a jaw-dropping and critically important graph of US economic growth with and without the effect of home equity cashouts. If you take out the effects of mortgage equity withdrawal, or "MEW," GDP growth has been practically flat over the past five years. While I've often noted that the economy is dependent on increased housing appreciation, even I am kind of amazed at the magnitude of the effect that the "home equity ATM" has had on GDP:

What's even more astounding is that these numbers only measure of the effect of MEW on consumer spending. The graph doesn't even account for the stimulative effect of red-hot employment growth in the realty/mortgage/construction complex. And Californians take note: this data is nationwide. Home equity cashouts have doubtless had an even larger effect on our local CA economies.

The "robust economy" is a cornerstone of the bullish case for housing. Yet here we see that without continued home price appreciation, the economy is not the least bit robust. It's a pyramid scheme at the macroeconomic level, and as perfectly circular an argument as one could ever hope for. Of course, none of this will stop the housing permabulls from continuing to make it.

You can view Mr. Risk's entire article here.

(category: )