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Consumers have been using their home equity as piggy banks, cracking them open whenever they saw something they wanted. Well, with falling house prices in many parts of the U.S., that piggy bank is empty and in some cases overdrawn with mortgage loans higher than the current value of the home. So what are consumers doing? They're slowing their spending habits.
Between 2004 and 2006, using all kinds of creative finance deals, consumers pulled $840 billion dollars a year out of residential real estate via sales, home equity lines of credit and refinanced mortgages, according to The New York Times today. These withdrawals of equity fueled $310 billion a year in personal consumption from 2004 to 2006.
But those withdrawals are slowing. Mark Zandi, chief economist at Moody's, said this past summer that the size of the withdrawals fell about one-third below the level of late last year. Zandi calculates that money taken out of houses was more than 9% of the nation's disposable income and that could drop to about 5%, which would be a difference of $350 billion a year, the Times reports.
In another story today the Times looks at the price of gasoline, which one expert expects could jump to $4 a gallon by next spring. Add the rising prices of gasoline to the lower availability of cash from home equity and you're looking at consumers who have less and less to spend. Christian Menegatti, a lead analyst for the consulting firm RGE Monitor, told the Times, "A fall of 2 percent in consumption would be big enough to trigger a recession."
I expect that the combination of the fallout from the mortgage mess and rising foreclosures, the increasing inventory in unsold homes and the falling prices in the value of homes will lead this country into its next recession. It's coming folks and we all need to save and be ready for some tough times.
Lita Epstein has written more than 20 books including the upcoming book the "Complete Idiot's Guide to Improving Your Credit Score," which includes lots of advice for how to pay down debt and get a handle on your spending.
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Reader Comments (Page 1 of 1)
11-08-2007 @ 7:27PM
Alouisis said...
For a time, the deception has worked. Now the reality comes into focus.
M3, the most complete measure of the money supply, is no longer reported leaving out components that show monetary growth of a staggering 14% per year. Next, GDP is not accurately reported leaving out components that drag down the number to an actual -2% growth. The inflation statistic is also fudged masking the true rate of 10%. Finally, unemployment is falsified, ignoring the heavily unemployed inner-city and discouraged workers by simply not including households in those areas in any of the surveys and 'redefining' unemployment. The real unemployment figure is 12.5%.
Our economy is on the skids and the government is intentionally misleading the people and the markets, a short term solution with disastrous results. BOHICA
11-08-2007 @ 2:56PM
FedUp said...
Not only are they fudging the unemployment numbers, they conveniently neglect to tell you how many have signed up for welfare because their unemployment benefits ran out.
Pretty soon I'll be working just to put gas in my car so I CAN go to work. (No, there isn't public transportation in my area - I'm rural.)
11-08-2007 @ 3:05PM
Marc said...
Everyone loves to blame the government:
First the Republicans were in charge, and it was all their fault. So Democrats were voted in to take control of congress. Anyone seen any big, positive change since that happened?
On the flip side, we've got all these fools taking out all of their home equity to buy huge gas-guzzling SUVs, boats, large plasma TVs....the list goes on!
Now (surprise!) home values are collapsing back to where they SHOULD be, and everyone's shocked and shaken. Shame on the greed that befowls this country. If everyone lived within their means in the first place, most of the current economic problems would have never come to pass.
11-08-2007 @ 4:33PM
william lindblad said...
I agree. It is public knowledge that credit card debt is at all time highs. It has also been reported that homeowners in default are protecting their plastic. There is little doubt that default will soon increase in this area.
Regardless of all the obvious negatives, optimism still remains. We have found ways to lessen impact.
Loss=write down. Recession=slowdown/sluggish
merde rhymes with terd and both = crap.
I really don't think that the use of euphemisims are going to result in a panacea.