For months it has largely been assumed that the ongoing housing market corrections would ultimately play out in the consumer spending arena - perhaps even leading to recession. The logic seemed sound: homeowners, grown accustomed to writing a check on the HELOC account to pay for their new cars and vacations, would slowdown spending in the face of both higher interest costs on their HELOC and stagnant equity growth in their homes.

But the Wall Street Journal (10/02/06) now reports that the home equity driven spending apparently is not the lynchpin of consumer behavior it was thought to be:

“A year into the housing market’s slowdown, Americans have yet to snap shut their wallets, defying predictions that the cooling market would have a chilling effect on consumer spending.”

While less money is being extracted from home equity than in the recent past, other factors including rising stock prices, falling fuel prices and good employment figures are helping to fill the void.

The article cites some interesting and positive (if little known) statistics about HELOC spending habits that are worth repeating:

• A recent survey done for Deutsche Bank Securities found that homeowners spent only about 14% of the money they cashed out of their homes - and that didn’t go back into their real estate investments - on consumer goods. The rest was either used to make other investments or to repay debt.
• The overwhelming majority of mortgage debt and home equity loansare held by Americans in the upper half of the income range. The top 10% of wage earners hold 42% of total home-equity credit lines, according to data from the Fed’s 2004 Survey of Consumer Finances. Thise affluent consumers have already racked up sizable gains in the value of their homes in recent years and can most likely afford to weather a modest pullback without cutting back their spending.

Technorati Tags: housing market, HELOC, Deutsche Bank Securities, Survey of Consumer Finances