Are consumers less likely to spend?

From Bloomberg:

Consumer Spending May Take a Hit as U.S. Home Prices Decline

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.

This entry was posted in Economics, National Real Estate. Bookmark the permalink.

8 Responses to Are consumers less likely to spend?

  1. thatbigwindow says:

    Kind of like the mid 1980’s all over again. I remember when I was in middle school I was dropped off in a well rusted 1976 Plymouth Volare with no AC and vinyl seats. In fact, no one I can remember had any special cars. No one was being dropped off in Mercedes and Caddies. This was all in the prestigious town of River Edge. My father had an 85 Aires with AC. That was the nice car in the family!

  2. bergenbubbleburst says:

    #2 tbw: Or of course the Chrysler Cordova, with the riccchhhh corinthian leather.

  3. LarryB says:

    Ah the distinctive sound of the Plymouth Slant Six motor.

    I truly worry about the Bugaboo generation and how they will be commenting on their upbringing 25 years from now.

    I’m in the research phase of this topic now and the joy I derive at reading this kinda stuff. Priceless.

    Really would have been more timely during yesterday’s $300 Jeans topic that rises to the surface every so often around here.

  4. Domi says:

    “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.”

    I don’t think people get it. I’m a buyer and the realtors, builders and sellers don’t want to budge on the price, which in turns makes me not interested anymore. Well thats their lose, I’ve decided to wait by the sidelines.

    Hey maybe I can find a foreclosed home and bid really low back to the 1980’s. That’s a real deal.

  5. Aaron says:

    I hope powdered milk never comes back in vogue. That’s all I remember from the 70s. And that Chinese food that came in two cans.

  6. Washington Mutual tightens mortgage lending
    Fri Apr 27, 2007 5:16 PM ET

    By Jonathan Stempel

    NEW YORK, April 27 (Reuters) – Washington Mutual Inc. said it is making fewer subprime mortgages and emphasizing higher-quality loans to boost earnings and cut risk after its home loans unit lost $113 million from January to March.

    The largest U.S. savings and loan said on Friday it is also significantly reducing loans that require little documentation of borrowers’ income or assets and second mortgages that let borrowers buy homes with little or no money down.

    Seattle-based WaMu, as the thrift calls itself, is making the changes amid an industrywide increase in defaults and foreclosures at a time that home prices are stalling and homeowners find it tougher to refinance as interest rates adjust higher.

    “We’ve completely changed the culture from a volume-based culture to a quality-based culture,” said David Beck, an executive vice president in capital markets, in a presentation to fixed-income investors.

    The home loan loss caused WaMu’s first-quarter profit to drop 20 percent to $784 million, despite higher earnings in its retail banking, credit card and commercial banking units. Overall home loan volume fell 34 percent to $29.6 billion.

    Beck said WaMu has reduced “piggyback” second mortgages and “stated-income” loans, sometimes called “liar” loans, because they require little documentation and can lead to fraud.

    He also said “we no longer do” combination loans, in which principal equals 100 percent of properties’ value.

    WaMu expects to slash subprime loans 70 percent this year to $8 billion from last year’s $27 billion. On April 18, it pledged to refinance up to $2 billion of subprime loans at below-market rates to help borrowers who might otherwise miss payments. Subprime loans are to borrowers with poor credit histories.

    The thrift also expects to boost “Alt-A,” or “Alternative-A,” lending, which falls between prime and subprime in quality. First-quarter Alt-A loans rose 49 percent to $7.6 billion from $5.1 billion, the thrift said.

    Other lenders that tightened loan standards this year include Citigroup Inc. , Countrywide Financial Corp. , IndyMac Bancorp Inc. and Wells Fargo & Co.

    WaMu shares closed Friday up 12 cents at $42.37 on the New York Stock Exchange. They are down 7 percent this year. The KBW Mortgage Finance Index and Philadelphia KBW Bank Index are down 6 percent and 1 percent, respectively.

  7. Now Playing: Homebuilder Blues (part 1)


    Chronicles some of the goings on during the National Association of Home Builders (NAHB) Construction Forecast Conference in Washington yesterday. Stresses the gloominess of the outlook forcing the conference to take a bit of a self-effacing comical tone. David Seiders states “Generally, the outlook for the housing industry has deteriorated since the beginning of the year.”

    Originally aired on: 4/26/2007 on CNBC

Comments are closed.