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Where Home Prices Drop, Malaise Follows


There is much debate among economists about the housing recession's impact on consumer spending. Although the national data contain few signs of any negative effect, a state-by-state look reveals that spending is sinking in places where the housing markets have truly gone bust.

In May home prices were down from the previous year in 15 of the 20 cities covered by the Standard & Poor's/Case-Shiller Home Price Index. The cities with the sharpest price declines were concentrated in Arizona, California, Florida, and Nevada. A broader view of the housing market via state existing home sales figures shows yearly double-digit declines in the first quarter of 2007 among the four states, as well as a 25.5% plunge in Hawaii.

State sales tax figures, a proxy for spending, are also much weaker in the hardest-hit states. In the U.S., first-quarter state sales tax receipts grew 2.8% from a year ago, according to figures from the Nelson A. Rockefeller Institute of Government, the public policy research arm of the State University of New York. Adjusting for any changes in tax laws, sales tax revenues in California and Florida declined over that period while receipts in Nevada, Arizona, and Hawaii grew much slower.

A drop in sales of homebuilding materials and equipment is a factor. But Florida retail sales figures show a broad pullback, with falling auto and durable goods sales and a sharp slowdown in consumer nondurables such as clothing. "It's hard to explain this trend if you don't believe that the housing bust has any impact on spending," says Jan Hatzius, Goldman Sachs' chief U.S. economist.

Hatzius expects national consumer spending data to show a slowdown as sales worsen in the major housing-bust states and begin easing in areas where home prices are now falling. Looking at home price data, the next batch of vulnerable areas appears to include Illinois, New York, and Washington, D.C. Indeed, the sales tax figures show consumers may already be starting to stay home.

By James Mehring


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