ROBERT SIEGEL, host:
Now, we're going to pursue those links between home prices, interest rates and consumer confidence with Daniel Gross of Newsweek Magazine. He's the author of the book, "Pop!: Why Bubbles Are Great For The Economy." And he joins us from member station WSHU, in Fairfield, Connecticut. Welcome to the program, Daniel.
Mr. DANIEL GROSS (Business Columnist, Newsweek Magazine; Author, "Pop!: Why Bubbles Are Great For the Economy"): Oh, thank you, Robert.
SIEGEL: And first, if people around the county are calculating the appreciation of their house and concluding that what appeared a year ago to be a home worth about 300,000 and on the way to being worth 350,000, may actually be on the way to being worth about 250,000, how is that likely to affect their economic behavior?
Mr. GROSS: It's likely to affect it pretty seriously. Home prices and low interest rates were like jolts of adrenaline or caffeine. They made everybody feel rich. They could tap their home equity lines of credit, they could refinance to get cash and use it to buy anything from cars, boats, college educations.
That exact process is happening in reverse now. The rising of interest rates, the lowering of home values and home equity makes people less likely and less able to tap into that. And so you are seeing, you know, car sales down 10 percent year over year, boat sales way down and cutting back manufacturing. Sales at Sears, Home Depot, anything that relates to the home are down year over year. So there's clearly less spending going on.
SIEGEL: And the key point here is that appreciation of home values was both a sort of vague general source of confidence, because you could subtract what you owed on your mortgage from whatever the Joneses just got for a comparable home, and say that you've got potential wealth. But you could also really tap into it with an equity access loan.
Mr. GROSS: Right. And that was the great innovation of this recent boom. The rollout of home equity lines of credit and this rapid-fire ability to refinance, really at the drop of a hat, get access to cash quickly.
SIEGEL: Now, the Federal Reserve reported last year on what had happened to the net worth of American families over the years 2001 to 2004. And they found that while there were gains in appreciation of their homes, but also in investments, because the markets have been going up, all those gains were almost erased by increases in household debt. So what happens if markets go down, home prices go down, and household debt continues to go up?
Mr. GROSS: Well, you certainly will get more foreclosures, which lead to the cancellation of some of that debt. And you start to see more people saving. In other words, they're going to start paying down or taking out less debt. And in America, that means less consumer spending.
SIEGEL: If there was some saving, though, some savings, that would be seen as a positive development, wouldn't it?
Mr. GROSS: It depends who you are. If your livelihood depends on selling cars, boats, furniture to people, you don't want people to save. You want them to spend. Savings tends to go into investments, which can go all over the globe, really.
SIEGEL: Let's go back to Bob Clayborn whom we heard from in Chris Arnold's piece, that's the gentleman from Garden Grove, California, who isn't going to borrow this year, but he figures interest rates will come down. He has a lot of appreciation in his home, he's confident that things will be better. Do Americans typically share that confidence that if you ride it out, pretty soon things will be back to normal?
Mr. GROSS: I think they do share that confidence. I think in this instance, it might be misplaced. The reason home equity lines of credit were so low and that we had these teaser rates were that the Federal Reserve Board took short-term interest rates down to 1 percent. We're not going to see those levels any time soon.
SIEGEL: That's Newsweek's Daniel Gross, author of "Pop!: Why Bubbles Are Great For The Economy." Thanks a lot for talking with us.
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