The Consumer Spending Problem Wall Street Doesn't See Coming
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Well there certainly are a lot of opinions in the news media out there concerning
the economy, lenders, recession, etc...
Let's just apply some common sense for the moment.
Consumer spending drives the economy. But what drives consumer
spending? Lot's of things, but here are my thoughts. In the last 6 years, we've
had rapidly rising home values. Any of you reading this that have bought or
owned homes from 2001-2006 have yourselves felt the sense of security that came
from knowing you had appreciating real estate to "back you up."
To compound this confidence in real estate appreciation, the last 6 years have
held unprecedented recklessness in spending. Spending is good,
but reckless spending is bad. Numerous statistics point to American's inability
to independently save, plan for retirement, or spend less money than they make.
In fact, we spend more money than we make, by an average of 20-30%.
But, it was all "OK" because of rising home equity. Go ahead!
Run up the credit card debts! Bolster the stocks of the companies gladly taking
the money you don't really have! What does it matter if John and Jane make 40k
a year together and got a 100% stated income loan on a 500k house if they can
pull out a HELOC 6 months later that will make their mortgage payments for the
next 3 years? Who wouldn't want to "ride the snake?"
The point is the equity has dried up, and is going backwards in most markets.
Although we've felt major fallout from prices and lending guidelines, we have
not felt the worst of it. You haven't even seen the brunt of the mortgage
problem, because it will not show itself as explicitly or as quickly
as a foreclosure or short sale.
No equity or ability to tap it means we have one of three options:
- Focus paying off the debt we ran up in the last couple years
- Stop buying so we don't fall into the plight of the debt-ridden
- Charge off the debt which ultimately damages stocks and further hampers one's
ability to spend in the future.
Bottom line, you haven't yet seen the degree to which consumer "participation"
in this economy will decrease.
The majority of a certain demographic of consumers are just now beginning to
see they are on the hook for their debt and don't really have a windfall of
home equity to help them pay it off. For them, just as it has been for the lending
community, it's "back to basics." Incur a debt, pay it off. So on
and so forth. The only problem is that the DJIA reflects a consumer that was
able to incur more debt than they were able to pay off by the sheer virtue of
their paychecks.
The rug has been pulled out from under those consumers. This massive chunk
of the populace, even if they don't succumb to grim fates of short sale,
bankruptcy or foreclosure are still not going to be able to participate in the
economy to the same extent as they did when home equity was rising.
There is a delayed effect! They gradually feel the squeeze of increasing debt
and seek consolidation loans only to find out they don't qualify because of
home values or credit tightening. They will not foreclose. They will not go
bankrupt. They will simply stop spending money. The immediate
signals of foreclosures and bank write downs are here, but the above mentioned
gradual effect is just beginning.
These people stop spending money and the economy suffers. I haven't heard any
of the experts say just how bad it really is going to be.
Regardless of impassioned predictions by "experts," try evaluating
the above facts and listen to what your common sense tells you. All of that
"play money" that the average Joe had in the last 6 years is gone.
Stop the recession prognostications, please! Whether or not we're in,
out, or going to be in a recession all depends on your definition. 10 years
looking back, late 2007 through 2009 will be viewed as a recession. For all
the predictions and opinions, mortgage brokers are in a unique position to see
this direct cause and effect relationship between debt consolidation and consumer
spending. Lower values and ability to tap them lead to consumer debt NOT being
consolidated. That debt not being consolidated leads to lower consumer spending
and confidence. That lower participation will continue to slow the economy.
End of story.
We would do better to occupy our time discussing how we can create
positives from this situation as opposed to analyzing why and how it
might or might not get better or worse. Any unexpected mitigating factor can
change the trend of the economy at any time. So even my commentary here may
be rendered invalid at any time. Instead of talking about whether or not the
ship is sinking, let's shut up, patch holes where we see them, bail the water
where we can, and hope we're still on board when we reach dry land. Then we
may have a chance to evaluate our ship's design, and minimize our discussions
about its seaworthiness in the future.
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