Let’s see. Between July 2007 and January 2009, the median US residential housing price plunged from $230k to $165k or by 30%. That must have been some kind of super ‘tax cut’.
In fact, that brutal housing price plunge amounted to a $400 billion per year ‘savings’ at the $1.5 trillion per year run-rate of residential housing turnover. So with all that extra money in their pockets consumers were positioned to spend-up a storm on shoes, shirts and dinners at the Red Lobster.
Except they didn’t. And, no, it wasn’t because housing is a purported ‘capital good’ or that transactions are largely ‘financed’ at upwards of 85% leverage ratios. None of those truisms changed consumer incomes or spending power per se.
Instead, what happened was the mortgage credit boom came to a thundering halt as the subprime default rates became visible. This abrupt halt to mortgage credit expansion, in turn, caused the whole chain of artificial economic activity that it had funded to rapidly evaporate.
This post was published at David Stockmans Contra Corner on December 16, 2014.
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