SURPRISE: The "Household ATM" Was A Myth, And That's Why Spending Hasn't Collapsed

The economic rebound has confounded the experts in numerous ways, but perhaps nothing has been more shocking than the rebound in consumer spending back to all time highs.

First of all, unemployment remains elevated, and second of all, home values (and thus homeowner equity) has continued to collapse.

And remember, the dominant myth is that prior to the bust, we were a nation of people using their homeowner equity to buy flat-screen TVs and Nintendo Wiis.

But it turns out this just isn’t true, as Steven C. Wieting pointed out in a note this week.

Notice something about this chart? That’s right, on the way up, the monster boom in household equity didn’t really affect spending at all.

consumer spemding

Photo: Steven C Wieting, Citi

So, then, if not homeowner equity, what does/did drive consumer spending?

This chart answers that. Spending has been closely coupled with income for decades, and equity extraction, starting in the early 90s, didn’t cause a decoupling on this front.

income spending

Photo: Steven C Wieting, Citi

Of course, this is still a little bit frustrating, because it doesn’t explain where all that equity extraction went to (surely it had some effect), but the idea of the house being everyone’s ATM appears to be a myth.

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