Debt-fueled household spending is unsustainable and should not be counted on as a key driver of US economic activity, Amir Sufi said at Chicago Booth’s Economic Outlook 2013 in San Francisco.
Sufi, professor of finance at Chicago Booth, said that despite the nascent recovery of the housing market, it has changed fundamentally, and ultimately for the better. “We shouldn’t think of the current housing recovery as inducing the same kind of behavior as what we saw prior to the Great Recession,” Sufi said.
Tighter credit standards in the mortgage industry have made it harder for low credit score individuals to borrow, and that has contributed to a mitigated “housing wealth effect,” according to Sufi. The people who were likely to borrow aggressively against their homes to spend money on home improvements have become renters, he said.
“The only people who can borrow against their home equity are precisely the people who aren’t likely to borrow against it to consume,” Sufi said.
A second indication that this housing recovery is different than in the past is the “rise of the investor” in housing markets, Sufi said. There is a positive correlation between house price rises and the fraction of homes purchased by investors in 16 cities, and that is cause for concern, he said.
“It means that cities where investors are buying a lot of properties are exactly the cities where you’re seeing the strongest house price growth. That isn’t the kind of robust housing recovery we think can really drive economic activity,” Sufi said.
Sufi and his frequent coauthor, Atif Mian, professor of economics and public policy at Princeton University, estimate that homeowners pulled $1.25 trillion of equity out of their homes from 2002 to 2006. “One of my big worries is that the real aberration is not the current weakness of the economy. It’s what happened from 2002 to 2006,” he said.
US retail sales data demonstrate a fundamental change in household spending patterns since the recession. “Most macroeconomic models of cycles would say that you should catch back up to trend,” Sufi said. “We’re not seeing that.”