U.S. spending on housing fell in the fourth quarter by the most in 26 years as the residential real estate slump started to curtail consumer spending.
Residential investment, the money spent on construction, renovation and broker fees associated with sales, dropped 24% in the period, the biggest decline since the fourth quarter of 1981, according to the U.S. Department of Commerce.
“The tentacles of the housing recession which began in 2006 are slowly but surely starting to strangle the rest of the economy,” said Paul Kasriel, chief economist for Northern Trust Corp. in Chicago. “With the decline in home equity we’ll be seeing less equity extraction to fund consumer spending.”
As potential buyers waited for home prices to fall further, the amount of cash they borrowed based on the equity in their homes declined by half since March 2006, according to the Federal Reserve. That has cut into the funds that consumers have to spend and put a dent in the U.S. economy, Kasriel said.
U.S. median home prices rose 50% from October 2001 to October 2005, enabling homeowners to easily refinance their mortgages and withdraw some of the equity gained from climbing home values. Borrowers took $1.26 trillion in cash out of their mortgages in the first quarter of 2006, the most in 13 years, according to the Fed. That number declined to $580.4 billion in the third quarter of 2007, the Fed said.
Consumer spending, which accounts for about two-thirds of the economy, grew at a less-than-forecast 2% pace from October to December. Spending increased 2.9% for all of 2007, the least in four years.
The drop in residential investment shaved 1.2 percentage points off U.S. gross domestic product growth, the Commerce Department said.