Carol Francis says her customers are less likely to make big furniture purchases these days than they were at the height of the housing boom two years ago.
“The housing market right now is affecting everybody’s spending,” said Francis, a design consultant at Thomasville Home Furnishings in Woodbridge, Virginia, 25 miles south of Washington. Before, “I had people who would buy two and three bedrooms of furniture. Now many come in and just buy one piece at a time.”
With home prices in danger of falling this year for the first time in at least four decades, Americans are turning wary about borrowing against their houses to pay for vacations, education or remodeling projects. In a reversal of the “wealth effect,” people who once viewed soaring home values as a rationalization for higher spending appear to be pulling back.
“We’re in a housing recession; it’s not over and it’s going to spread to other parts of the economy, mainly consumer spending,” said Paul Kasriel, director of economic research at Northern Trust Securities in Chicago. “House prices are going to continue to fall, and that’s going to play havoc with consumers because it means the home ATM is now draining, it’s no longer filling.”
While home sales and construction have been falling for more than a year, the secondary impact on consumer spending, which accounts for 70 percent of the economy, may just be kicking in.
Kevin Logan, senior market economist at Dresdner Kleinwort in New York, says the reverse wealth effect will subtract about 0.7 percentage point from consumer-spending growth this year. He expects spending in the fourth quarter to be 2.7 percent higher than a year earlier, compared with growth of 3.6 percent in the fourth quarter of 2006.
Some economists say the consumer still has staying power.
“People have been a little too quick in looking for the consumer to cash it in,” said Ethan Harris, chief U.S. economist at Lehman Brothers Inc. in New York. “Housing wealth looks like it’s flattening, not collapsing.”
John Silva, a software salesman in Raleigh, North Carolina, makes about $45,000 a year and has struggled since his monthly mortgage payment adjusted to $1,205 from $945.
“I have a 20-year marriage anniversary coming up, but it won’t be what I had wanted it to be,” he said. “We can’t even afford going to fast-food restaurants, never mind a nice restaurant.”
Median existing-home prices will drop 0.7 percent this year from 2006, the first decline since recordkeeping began in 1968, according to the National Association of Realtors. Prices in March were below year-earlier levels for the eighth consecutive month.
“Without home prices rising any more, people will become more cautious in their spending,” said Raymond Stone, managing director at Stone & McCarthy Research in Skillman, New Jersey.