Will Slower South Florida Housing Market Slow Consumers’ Holiday Spending?

In short, no.

Ask Nancy Bagley about the relationship between the South Florida housing market slowdown and her net worth, and the Delray Beach homeowner is emphatic.

“Absolutely, I feel less wealthy,” says Bagley, who works as a business consultant.

It’s a sentiment shared by many homeowners in Palm Beach County and the Treasure Coast as the once-sizzling real estate market cools, a story in today’s Palm Beach Post indicates.

The median price of a single-family home in Palm Beach County fell 12 percent from October 2005 to October 2006, while national home prices dropped a record 3.5 percent for the year. An increasing number of home sellers are getting less than they paid for houses bought last year or earlier this year, according to Palm Beach County property records.

But ask Bagley how her shrinking nest egg will play out in her holiday spending and she’s less adamant. She plans to spend more on charitable donations and gifts for those on her short shopping list.

As the U.S. economy enters the crucial holiday spending season, retailers and economists are struggling to make sense of how the end of the historic housing boom will affect the annual buying binge.

The consensus: The housing market slump won’t exactly help holiday spending, but Americans will continue to consume as they always do.

“We should see some effect, but not a big one,” says Christopher Carroll, an economist at Johns Hopkins University.

Carroll is one of the few economists to put a number on how changes in home equity affect spending. In a recent study, Carroll and two other economists conclude that for each $1,000 of increase in a home’s value, the owner will spend an extra $20 in the short term and $90 over several years.

And as Florida mortgage loans get harder to afford and home prices decline, consumers will cut spending by the same amounts. So big drops in housing wealth would “substantially” hurt consumer spending, Carroll says.

But, as Bagley’s spending plans show, the dismal science is an inexact discipline. She might feel poorer, but she’s spending more.

Mixed signals aside, economists agree that retailers can expect another year of frenzied holiday shopping, although some warn that the housing slowdown will eat into the local economy and consumers’ ability to spend.

The run-up in home prices from 2000 to 2005 created a “wealth effect” that made Americans feel richer and more eager to consume. After all, if times got tough, homeowners could tap into their rapidly escalating home values by refinancing their mortgage or taking out a Florida home equity loan.

But now that home values are slipping, is there a reverse wealth effect that threatens to silence cash registers? Tough to tell. But Bill Hampel, chief economist at the Credit Union National Association, says the real estate slump means homeowners will have to start saving the old-fashioned way, rather than continuing to spend more than they earn.

“We’ve asked consumers that numerous times, and we don’t really get much,” Hampel says. “I’m not a big believer that these fringe items (such as the wealth effect) have much of a role in holiday spending,” he said.

“Our houses have been doing our saving for us for most of this decade, and that is ending. But most people’s net worth is so far above what they ever expected it to be that they don’t feel they have to start saving. It’s sort of like easy come, easy go.”