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Midday Musings: Is the Consumer Too Strong for Everyone's Good?

Another robust housing report raises the question of how big the bubble can get.

The housing market remains incredibly robust, particularly amid a recession.

But there may be an unsavory side to the boom, which continued last month as

new home sales rose 5.7%. That was the fastest pace since March and in contrast to expectations for a slight decrease. November's results were revised lower but, at an annual rate of 900,000, new home sales set a record in 2001, as did sales of existing homes and the combination thereof.

But accompanying the robust data are long-standing concerns that a bursting of the "housing bubble" is imminent because of U.S. consumers' skyrocketing debt levels, of which housing is a major contributor.

Certainly, there is reason for concern: Household debt rose 7.8% on a year-over-year basis in the third quarter, pushing the debt-to-income ratio to an all-time high. Additionally, household's debt-service burden -- the ratio of principal and interest payments to income -- is approaching record levels reached in late 1986.

"Household debt undoubtedly grew even faster last quarter," according to Goldman Sachs economist Bill Dudley, who noted "such rapid debt growth is unusual during a recession."

The bearish spin is that the crushing levels of debt will cause U.S. consumers to (finally) retrench, effectively ending the economic recovery in its infancy.

However, Dudley believes consumers' high debt "is not likely to block further gains in consumer spending." Why? Because "debt levels have not climbed sufficiently to cause lenders to restrict the availability of credit significantly," he wrote.

Among others, we can thank


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Chairman "Easy Al" for this somewhat perverse cycle whereby the more consumers borrow, the more creditors encourage them to borrow. But Dudley noted loan delinquency rates are "well below" peaks reached during the 1990-91 recession even as debt-service burdens of low- and moderate-income homes have been rising faster than the aggregate.

Just you wait, 'Enry 'Iggins

say the skeptics, who believe delinquencies have nowhere to go but up. But while Dudley believes rising debt levels will make it "difficult for the economy to pick up steam and grow rapidly," he dubbed the issue a "constraint" to growth, "not a barrier."

Another thought about housing: Could it be that the housing market won't "crack" because of demographics? That is, because Baby Boomers are in their prime earning/home buying years, the sheer force of their numbers will sustain the strength in the housing market.

Then again, we heard the same argument made about the stock market in the late 1990s.

Midday Market Muse

In reaction to the housing data, the dollar climbed to a six-month high vs. the euro and a five-month high vs. the Swiss franc, while two-, five- and 10-year Treasury bonds weakened. But after some early gains, major stock gauges had slipped below break-even at midday as investors faced the following conundrum: whether to rejoice over signs of the economy's improvement or fret that the Federal Reserve is apparently done with its year-long easing cycle.

It's early yet, but I suspect this will be a prevailing theme for the week, or at least until the Federal Open Market Committee's two-day meeting adjourns on Wednesday. As of this morning,

fed funds futures were pricing in a less-than-10% odds of another rate cut this week. Only two of 24 primary bond dealers believe the Fed will ease again.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.