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What's Keeping Wallets Closed?


Economic Trends

WHAT'S KEEPING WALLETS CLOSED?

Why has consumer spending stayed so subdued in the face of falling interest rates? Economist Joseph Carson of Dean Witter Reynolds Inc. thinks one neglected cause has been wealth erosion in the housing sector.

Carson points out that homeowners' equity has fallen from 73% in 1983 to 57% today (chart). In the 1970s and 1980s, he notes, consumers borrowed against equity in their homes or used part of the proceeds of home sales to finance hefty outlays. Today's low equity level suggests that many people, particularly in the Northeast and West Coast, may have little or no equity in their homes--"a major deterrent to buoyant spending."

Soft home prices are one reason owners' equity is so low. Although sales of existing homes perked up a little in May, they are still running 13.6% below year-earlier levels, and median home prices are down in both real and nominal terms. With home equity the largest single asset held by most households, Carson thinks flat to falling home prices may be less of a spur to home sales than a damper on spending by people disheartened by falling real estate values.BY GENE KORETZ


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