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U.S. Housing Crisis Is Turning Spenders Into Savers

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Bloomberg News

Published: July 17, 2008

The U.S. housing crisis may accomplish what years of parental hectoring couldn't: Turn Americans from spenders into savers.

Spending will fall because homeowners can no longer use rising real estate values to borrow cash - $837.5 billion in 2006, according to a report by former Federal Reserve Chairman Alan Greenspan and economist James Kennedy.

With mortgage lenders requiring down payments of 20 percent, the average household, which puts away less than 1 percent of after-tax pay, will have to save 10 percent for 10 years to buy a home.

The housing market shaved almost 1.6 percent off gross domestic product growth in the first quarter and cut in half the growth rate of consumer spending, which accounts for more than two-thirds of the economy, said Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pa.

'Loss Of Housing Wealth'

"The loss of housing wealth is the difference between a recessionary economy and a growing economy," said Zandi, an adviser to presumptive Republican presidential nominee Sen. John McCain of Arizona. "Consumers have powered the global economy for the past 25 years. For the foreseeable future, maybe the next 25 years, the savings rate will move higher."

The worst housing crisis in at least a quarter century has a long way to go, Zandi said. It will take until 2015 for the median home price to return to its July 2006 peak of $230,200. But home sales and residential construction will never again reach record highs of 2005 and 2006.

Lenders will issue 53 percent fewer purchase mortgages this year than in 2006, making home sales difficult and delaying a housing recovery, said Guy Cecala, publisher of industry newsletter Inside Mortgage Finance in Bethesda, Md.

Getting a home loan may also be made more difficult by plummeting investor confidence in Fannie Mae and Freddie Mac, which own or guarantee 81 percent of the mortgages issued this year, according to the Washington-based Office of Federal Housing Enterprise Oversight.

Fannie Mae, the largest U.S. mortgage finance company, and Freddie Mac, the second-biggest, have both lost more than 50 percent of their market values since July 7.

Said Cecala: "You've never seen the mortgage industry this passive in lending in the past 50 years. They don't want any more missteps creating any more losses. The flip side is it's not helping anybody stay in homes or buy homes. You can't have a housing recovery without financing."

Days Of Wine And Roses Over

The housing decline will "change the structure" of the U.S. economy by forcing Americans to save, said Neal Soss, chief economist at Credit Suisse Group in New York.

"The days of wine and roses are over," said Soss, who worked at the Federal Reserve for former Chairman Paul Volcker in the 1980s. "We were drunk on money. Getting sober is a painful process."

Consumer spending, which rose 7.5 percent since the beginning of last year, will fall into negative territory after Americans run through their tax rebate checks this summer, said Bill Hampel, chief economist for the Madison, Wisconsin-based Credit Union National Association.

Two years ago, lenders made $2.7 trillion in mortgages, $600 billion to subprime borrowers with bad or spotty credit histories.

Now, financial firms, responding to $415 billion of real estate-related write-downs and credit market losses, are forcing even the most creditworthy buyers to make higher down payments.

"The mortgage industry always works like a pendulum," said Rick Sharga, vice president for marketing at RealtyTrac Inc., an Irvine, Calif., foreclosure database. "Two years ago they were giving loans to anyone who could fog a mirror. Now you need perfect credit and a significant down payment."

The bundling by banks of residential mortgages into securities that are sold to investors and are used to fund home loans was a $1.15 trillion market in 2006, according to Inside Mortgage Finance. In the first half of this year, banks issued $46 billion of the so-called private label securities.

Saving enough money is the only thing stopping Floridian Nick Ruiz, 22, from buying a house. Ruiz, a paramedic from Hialeah, said he has steady work, good credit and can verify his income. He's even found foreclosed houses for sale in his price range in Hialeah, 12 miles northwest of downtown Miami.

The only missing ingredient is the $30,000 down payment.

"I'm getting married in August and we wanted to have a house when we came back from the honeymoon," Ruiz said. "We'll have to live with my parents."

Ruiz said that he and his fiancee have credit card debt. Ruiz said he made a decision to postpone saving for a down payment until he can pay off the $12,000 that he owes.

"I figured it makes no sense to put money in the bank because no bank will give me the interest rate that these credit cards are charging," Ruiz said.

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