Stock and Real Estate Bubbles Helped Keep Consumers Spending - What Happens When They Burst?

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For the past year or two, economists and market analysts have gushed with varying degrees of astonishment at the steady growth of consumer spending–bucking the tides of high inflation, interest rates, gloomy sentiment, and the pandemic’s collateral economic damage.


Topping my list of reasons would be the explosion in the stock market and in home prices.

A lot of people are feeling flush today, but how much longer can the good times last? What happens if, as it usually does, they come to an end?

By any measure, the U.S. is awash in wealth. The S&P 500 index today is about 80% higher than it was five years ago. That compares with the 21% cumulative inflation rate for the same period. An enormous amount of paper wealth has been created in a very short time.

The market’s high tide has been lifting many boats. Fidelity Investments recently reported that in 2023’s fourth quarter, the number of its clients who had become (on paper) IRA millionaires hit a record, 40% more than a year earlier. The number of their 401(k) millionaires spiked by about 20% in a single quarter.

Fidelity said the average age of the 401(k) millionaires is 59. Most 59-year-olds who have watched the value of their retirement funds soar in the past year (the S&P 500 is more than 25% higher than a year ago) will likely feel a little smug, maybe even rich. Those with older parents whose retirement accounts have also flourished may feel less urgency about setting aside money for when Mom and Dad need costly full-time care.

Likewise, many homeowners may feel like they’ve hit the virtual jackpot.

The surge in home prices powered homeowner real estate equity to a level that hasn’t been seen in 55 years, recently around 72%, according to Federal Reserve data for the fourth quarter of last year. American homeowners are sitting on about $32 trillion in equity, about $10 trillion more than the effect of overall inflation during the same period.

Although half of Americans don’t have a retirement account, the number of retirement fund millionaires is relatively small, and homeowner equity isn’t cash in your pocket if you can’t sell, consumers seem to have picked up the vibe that the future looks bright. 

But there are warning signs that this household net worth bubble may have a leak, or worse.

A possible canary in the coal mine may be what’s happening in Austin, Texas, a university town that the tech industry adopted as a sister to Silicon Valley, dubbing it Silicon Hills. The town boomed, real estate values soared, jobs were plentiful. 

Now, according to a recent Wall Street Journal report, “Austin Is Running in Reverse.” Overbuilding and tech industry downsizing have hit the real estate market there. Prices have fallen more than 11% since 2022, the biggest drop of any metro area in the country according to the Freddie Mac House Price Index.

In the bigger picture, major demographic trends are at work that could lead to a substantial decline in home prices in the near future. So says Meredith Whitney, the financial analyst who Bloomberg dubbed “The Oracle of Wall Street” for having predicted the financial crisis of 2007-2008.

In a recent Fortune article, Whitney noted that household formations are the lowest they’ve been in more than a century, which is dampening demand. People and households over the age of 40 own most of the nation’s homes. 

Whitney is predicting, among other things, a “silver tsunami” that will swamp the housing market as baby boomers age out of their homes.

“I think you’re going to start to see housing prices begin a multi-year/decade decline, just due to supply/demand dynamics,” she said.

Then there are all the other wild cards that could knock the legs out from under the stock market: a bank failure; a terrorist attack; another pandemic. Take your pick. There’s always going to be something. More likely, it will be some combination of all of the above as opposed to a single catastrophic event. 

Even if none of those things happen, and Meredith Whitney is wrong, history tells us that a stock market that goes up too fast has to come back down for a rest. It is common sense, as well as history, that a housing price bubble eventually pops. If that happens, consumer sentiment will tank. 

Hit hardest will be retailers that aren’t prepared and, according to Wall Street Journal industry reporter Jennifer Williams, most aren’t.

“The CFOs that I spoke with have started to say that they are anticipating that the consumer will eventually pull back some on their discretionary spending,” she said on a recent Wall Street Journal podcast. “But they're not budgeting for that, and they're not forecasting for that this year.”


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