Drop In Home Values Depresses Consumers' Outlook

What are we consumers so glum about that we’re not out there freely spending on the goods and services we import and, decreasingly, produce? I mean, besides the fact that many of us are out of work, the incomes of those of us who are employed are stagnant or have declined and we’ve all pretty much given up on politicians’ abilities to fix things? For those of us who still own our home, it’s their declining values.

The average price of a home in the U.S. has declined for the first time since the Great Depression, Binyamin Appelbaum points out in a front page article in the New York Times this morning, and we’re not talking about a percentage point or two. In markets such as Orlando, the total value of homes has fallen below the total mortgage debt taken out on them.

“People don’t expect their home to regain value, and that’s really led to a change in consumer attitudes about the economy that we’ve just never seen before,” Richard Curtin, a professor of economics at the University of Michigan tells Appelbaum, who reports that a Congressional Budget Office study in 2007 found that people reduce spending by $20 to $70 a year for every $1,000 decline in the value of their home.

Indeed, the University of Michigan’s latest Survey of Consumers shows that expectations for economic growth have fallen to 47.0 from 49.4 -- the lowest level since May 1980.

"Overall, the data indicate that a recessionary downturn is likely to occur," according to Curtin, who directs the survey. "Even if the economy manages to avoid the formal recession designation … real consumer expenditures will not be strong enough to enable the more robust job growth that is needed to offset the negative grip of economic stagnation on consumer behavior."

Appelbaum interviews several people who have been hit by the downturn in Orlando, including the owner of a stonecutting business who was forced to take a huge hit on the sale of his home and downsize both his personal life and his business -– meaning less money to spread around.

“We’re never going to get that big again,” he says. “I was someone employing people and taking people to the good life. Now I’m just trying to survive.”

The Los Angeles Times, meanwhile, reports that the number of notices of default –- the first step in the foreclosure process –- rose 25.9% in the third quarter from the second in California even as settlement talks between banks and state attorneys general over the robo-signing scandal seem to be getting nowhere fast.

“Activists and consumer advocates criticized the recent default-notice increase as a move in the wrong direction,” writes Alejandro Lazo. “They have been protesting foreclosures and urging bank and government officials to take further steps to stem the tide of home seizures.”

"Everyone in the economy is being hurt because the banks, the administration and Congress are not doing anything about the foreclosure crisis," Richard Hopson, chairman of the Alliance of Californians for Community Empowerment tells Lazo.

The refinancing plan for underwater borrowers that the AGs are proposing would only bring down interest rates on mortgages for those who owe far more than their homes are presently worth, sources tell Diana Olick. Writing in the “Reality Check” blog on CNBC.com, she’s told a deal is getting closer but that it would target a finite number of borrowers (albeit more than 10 million) who are current on their mortgages." She’s not gleeful.

“It's not the borrowers who are current on their payments that need help, it's the 4 million or so seriously delinquent loans that are heading toward foreclosure, it's the glut of distressed properties now streaming out onto the housing market at ever greater speed, and it's the complete lack of consumer confidence in housing right now that has turned home prices down yet again and kept home sales at historically and unsustainably low levels for recovery,” Olick writes.

And while the Wall Street Journal recently reported that for-sale inventories dropped 20% in September over a year ago, that doesn’t mean prices have risen, as one would expect in a market economy. Just the opposite, in fact.

"Many of the places with the biggest inventory reductions have also had some of the biggest price declines in the past year," Jed Kolko, chief economist at real estate information website Trulia tells US News’ Meg Handley. And things could get worse once prices start to inch up because a lot of sellers have taken homes off the market just waiting for a little sign of life. Who or what to blame?

“Weak consumer demand,” writes Handley, which “has been an ugly and persistent symptom of the Great Recession, impacting every corner of the economy from manufacturing to retail.”

Is weak demand a symptom or a cause, one wonders. Or both?

"Until you can restore confidence, you can't move forward," says General Electric CEO Jeff Immelt. The implicit Catch-22, of course, is that until we start to move forward, it’s pretty darn hard to buck up and exude optimism. Or even to pretend that we’re not afraid that there’s worse news to come.

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1 comment about "Drop In Home Values Depresses Consumers' Outlook".
  1. Paula Lynn from Who Else Unlimited , November 6, 2011 at 6:35 p.m.
    If one considers a house and investment, an investment has risk involved. It can increase in value or decrease. When one cannot afford the risk, one should not invest in the purchase of a house. If one considers a house a place to live, then the value of the purchase price known before the purchase has the same value as when the house was purchased. The interest rates, loan approvals and foreclosure debacle is a different kettle of fish than value of a house to the owner. Most people cannot understand the complications of the legalize involved with purchasing property. If one cannot afford to hire a specialized attorney to represent his/her interests and who lays all of the actual costs and affordability, then one cannot afford the property. It's just a weaker demand; it's an unaffordable demand that is not there as it was before. In a decade or more, when 20% down is back to the norm and prices come down to affordability, the housing market will see upticks IF the banks are re-regulated in their lending practices.