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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: patron_anejo_por_favor who wrote (83)	7/6/2001 10:11:02 AM
From: ild	Respond to of 306849

THE 'RELATIVE' WEALTH EFFECT by Grant's Investor Staff 07:00 AM 07\|06\|2001 How to explain still-strong sales of new homes and luxury cars in an otherwise stagnant economy? Moody's economist John Lonski says U.S. consumers have yet to feel the pain because asset gains far outpaced spending at the end of the 1990s. "Where's the reverse-wealth effect," asks John Lonski in the latest issue of Moody's Credit Perspectives, as sales of new homes and luxury motor vehicles continue to skip ahead. Is it a case of reality be damned or are consumers perhaps immune to the high-tech/dot.com meltdown? It's a version of the latter, surmises Lonski, senior economist at Moody's. He thinks Americans accumulated a lot more wealth during the late 1990s than they spent, despite what may have looked like a "wild spending spree." So relatively speaking, things still seem pretty good to the optimistic U.S. consumer. The decrease in liquid financial assets (LFAs) -- things like mutual fund shares, bonds, stocks, etc. that can readily be converted into cash -- plumbed new depths in the first quarter, Lonski relates: "[T]he household-sector's liquid financial assets fell by 12.5% from a year earlier, to $22.7 trillion." There hasn't been a decline of that magnitude since record-keeping began in 1952. "Perhaps not since the Great Depression have the liquid financial assets of households plummeted so deeply year-to-year," he continues. "Yet, household expenditures still [grew]. In Q1 2001, consumer spending gained 5.6% yearly, while residential investment spending edged up by 1.1%." What is more, sales of new single-family homes continued to build in the first two months of the second quarter, rising by 9.7% at an annualized rate. Who would guess that, at the same time, liquid financial assets were shrinking like a cheap sweater in a hot wash? How to explain this apparent anomaly? Simply put, there's a lot more wealth where that came from. In the five years ended 1999, the average annual growth rate of household-sector LFAs was 13.1%, Lonski calculates, up sharply from the 5.9% average increase posted in the first half of the decade, and more than double the latter-half rise of 6% in average annual household expenditures. And looking back still further, Americans continue to be a lot better off than they've generally been over the past 30 years, even though the recent stock market implosion has sucked a lot of cash into the high-tech black hole. For perspective, Lonski notes that LFAs as a percentage of household expenditures peaked at 370% in the fourth quarter of 1999 before dropping to 306% in the bleak 2001 first quarter. Yet, that ratio is still more than the 301% average for the decade ended 2000 or the 262% reading for the 10 years ended 1995, and it towers above the 213% prevailing in the second half of recession-bound 1974. Maybe the current mood among those who watched their wealth balloon in the bubble market is one of "easy come, easy go." Of course, should the downturn in the stock market and the economy as a whole continue to siphon off liquid financial assets in the months ahead, American consumers may at last be forced to abandon their jaunty brand of devil-may-care complacency. Only time will tell.