TMCnet News
Behind the Meltdown: Equity plunge saps will to spend: Economy suffers as homeowners in area lose $2 billion in wealth in '07.(Sacramento Bee, The (CA) (KRT) Via Thomson Dialog NewsEdge) Mar. 2--Take $2 billion away from Sacramento's homeowners -- money they could be spending on cars or plasma TVs or kitchen cabinets -- and you begin to understand what the housing slump is doing to the region's economy. The impact of the real estate downturn goes far beyond the thousands of construction and mortgage- industry layoffs, or the epidemic of foreclosures. The 25 percent drop in housing prices since 2005 means fewer homeowners are able to borrow against their equity. Even those who could still borrow are more nervous about doing so. The result is a meaningful drop in housing's "wealth effect," making consumers less apt to spend money. Consumer spending is falling all over the country, not just in Sacramento, putting additional downward pressure on an economy that seems to grow more troubled by the hour. Last week alone saw a jump in nationwide unemployment claims, a prediction of bank failures by Federal Reserve Chairman Ben Bernanke and a sharp drop in a closely watched national index of consumer confidence. Additionally, rising energy prices led to fears of stagflation, in which the economy stagnates while price inflation rages. The falloff in consumer spending is a peril to a key pillar of the economy. In the four-county Sacramento area, equity "extractions" -- through refinancing, home-equity loans or outright home sales -- fell by 34 percent last year, according to market research firm DataQuick Information Systems. That erased $2.11 billion's worth of wealth from the region, a figure that one prominent economist called significant. Across the state, DataQuick said equity extractions fell by $25.36 billion last year. At least one big lender, Countrywide Financial Corp., is cutting off thousands of borrowers who obtained equity lines of credit but whose houses have since sunk in value. Scores of banks that once flooded mailboxes with loan offers are now rejecting homeowners looking for cash or lower rates. It's the opposite of what happened during the boom. When the market was strong, homeowners refinanced and borrowed heavily against their ever-increasing equity. That generated a huge increase in consumer spending, spreading the wealth effect of real estate to all corners of the economy. Allen Perez took out a $100,000 equity loan on his Rocklin home in 2005 to install a swimming pool and pay other expenses. But when Perez, who's now struggling financially, tried to refinance two weeks ago in hopes of lowering his monthly payment, he was turned down. The home is "upside down": He owes $530,000 on a property worth just $465,000. As a result, his family is cutting back on dining out and going to the movies. His two children had to drop out of youth soccer and baseball. "That's heartbreaking for a parent," said Perez, a Sacramento police officer. Judy Jones estimates she's taken about $165,000 out of her home in the Rosemont area through a series of loans over the past decade. Among other things, she spent it on a new sunroom, a backyard patio, vacations and her beloved khaki-colored Toyota Prius. Her latest loan, a refinance last April, netted her $28,000 cash, most of which went to pay credit card bills. "I've been living off that for 10 years, off the equity in this house," said Jones, 69. No more. Though she still has some equity, Jones said she is having trouble making her payments, is "maxed out" and "can never borrow another nickel." Divorced and on a fixed income, she has recently cut way back on clothing, restaurants and other expenses. She spent just $250 on Christmas gifts, down from her usual $1,000 or so, and jokes that she's single-handedly slowed the economy. "You noticed it's been taking a dive because I haven't been spending the last couple of months," she said. Plenty of businesses have noticed. "There are fewer parties booked, there are fewer big events happening," said Jim Boyce of Produce Express, a Sacramento food distributor. "Everybody from restaurants to caterers, they're all slowing down." Boyce said his restaurant clients are getting squeezed between slumping sales and rising costs for food and energy. In addition, many are trapped with too-high rents that don't reflect the new realities. The result will be empty storefronts, he said. "I think there's going to be a lot of losses before the thing straightens itself out," Boyce said. "In a way it mirrors the housing market." The slowdown, which has driven Sacramento's unemployment rate to 6.4 percent, underscores the degree to which Sacramento and other major California cities came to rely on the housing boom to drive the overall economy. The construction and finance sectors accounted for 40 percent of greater Sacramento's growth in 2005, according to the U.S. Bureau of Economic Affairs. The U.S. average was just 27 percent. The $2.11 billion reduction in equity extractions represents a little more than 2 percent of the region's overall economy. Coupled with the other effects of the housing slump, including layoffs and foreclosures, it's no wonder many analysts are predicting a recession. "When you take that kind of money out of the economy, it's significant," said Chris Thornberg of Beacon Economics, a Los Angeles consulting firm known for its analysis of the state's economy. Economists say the wealth effect is real and measurable. A study co-authored by Stuart Gabriel, a UCLA real estate economist, found that every $1 jump in home equity translates into 6 cents in new consumer spending. By contrast, every $1 increase in a person's stock portfolio yields only 2 cents in new spending. The difference "has to do with the psychology of consumer spending and how consumers view different pots of wealth," Gabriel said in an interview. During the boom, consumers viewed their homes as their most trusted and tangible asset; the price appreciation seemed more permanent than a run-up in stock prices. Besides, lenders were pushing all sorts of new products on the market, making it far easier to tap one's equity than to decide which stock to liquidate. "We got a good rate, it was a pretty low-stress transaction," said Sacramentan Jim Reilley, a state worker who obtained a $25,000 equity line in early 2007 to help pay medical expenses. "It turned out to be a good deal for us instead of having to use credit cards and all that." The days of easy money through home equity are about over. Lenders are more tightfisted. And many homeowners have concluded on their own that enough is enough. Larry Gaines decided he'd borrowed too much money already -- $100,000 through various equity loans and refinancings -- when he was offered another line of credit last fall. This time the south Sacramentan said no. "I finally got to the point where this was a wake-up call," said Gaines, 58, who works for AT&T in the East Bay. "I want to get my stuff in order so I can retire in seven or eight years." He and his wife have begun eating out less often and are "just buying less stuff." The downturn in spending is most pronounced among businesses closely tied to housing. The Naturwood furniture stores in Rancho Cordova and Roseville "have never seen a downturn in business like this," said owner Virginia Keyes. In the past few months, four furniture stores near Naturwood's Rancho Cordova location have folded. Keyes believes it's made shoppers more uptight. "The customers are becoming frightened -- who else is going (under)?" Keyes said. Overall retail spending grew just 2.1 percent on the West Coast last year, and that number was inflated by the soaring cost of gasoline, according to MasterCard SpendingPulse. Nationwide spending rose 6 percent. More troubling, West Coast spending in December was up only 1 percent from a year earlier. That's roughly in line with the kind of meager spending increases the nation experienced during the last recession, said Kamalesh Rao, the spending survey's economic research director. SpendingPulse is affiliated with MasterCard, but its survey results aren't limited to MasterCard spending. "People are just tightening their belts," said Sam Manolakas, owner of the Brookfields chain of family restaurants in Sacramento. "It's going to make everybody leaner and meaner." His business is down about 8 percent from last year. To see more of The Sacramento Bee, or to subscribe to the newspaper, go to http://www.sacbee.com/. Copyright (c) 2008, The Sacramento Bee, Calif. Distributed by McClatchy-Tribune Information Services. For reprints, email [email protected], call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA. |