Saturday, October 08, 2005

Mass Denial and Complacency

According to a recent survey conducted by RBC Capital Markets (Royal Bank of Canada), most people expect real estate to continue appreciating and believe that rising RE appreciation has not affected their spending habits despite the fact that the economic data says otherwise. The people at RBC Capital Markets are clearly worried and justifiably so.

The only word I can use to describe this level of complacency and lack of self-awareness is "shocking".

Some choice quotes:
"Despite fears in the marketplace about a U.S. housing bubble, about 60 percent of homeowners expect the value of their homes to increase by at least 5 percent annually during the next several years, according to an online survey of 1,001 American consumers."

"...24 percent of respondents said they expect annualized gains of 10 percent or more over the next few years. About 3 percent of respondents said they expect their home values to decline over the next few years."

"...about 10 percent of the respondents said rising home values have affected their spending habits. And over half of those surveyed disagreed with the notion that real estate gains impacted their spending even though 51 percent either sold their home or borrowed against their home equity in some fashion."

""Not only are most people expecting big real estate gains to continue, the vast majority of people don't believe these gains have impacted their spending. These opinions run contrary to most data in the marketplace regarding the real estate wealth effect," said Scot Ciccarelli, managing director of equity research for RBC Capital Markets."

""We believe these findings raise a major question. In our minds, the question is whether people have spent more freely than they otherwise would have because of their real estate gains and don't even recognize it. If that's the case, a simple slowing of real estate gains, not just a fall in housing prices, could have a significant adverse impact on spending patterns.""

""This outlook seems to cut to the heart of the American consumer. People seem to be conscious of the macroeconomic headwinds facing them like rising energy prices, the war on terror, and the growing federal deficit and the impact it can have on others. However, they are less inclined to believe they can be affected by these same factors."

Add on top of that rising energy prices which are here to stay, increased regulation on loose lending practices, the new bankruptcy and credit laws, a higher rate of inflation than what has been previously acknowledged, rising mortgage rates, and we have some interesting times ahead to say the least. I'd hate to be a debtor now.

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