Karen Benton is one reason consumer spending can’t be counted on to help the U.S. economy grow.
The 55-year-old interior designer bought her three-bedroom, two-bath Marina Del Rey, Calif., home in 1990 for $318,000. Five years later, the house is worth $240,000, less than the $256,000 mortgage.
Benton is one of millions of Americans whose homes have tumbled in value in recent years-and who now won’t be able to use their homes to finance big-ticket purchases as in years past or as a security blanket for tough times.
“One of the reasons the consumer spending cycle is so weak this time around is the loss of wealth in homes,” said Joseph Carson, Dean Witter Reynolds Inc.’s chief economist.
The statistics tell it best: Federal Reserve Board figures show that the average homeowners’ equity equaled just 57 percent of the value of the average home in 1994, down from 73 percent in 1983.
In California alone, one of the hardest hit states, an estimated 302,337 homeowners, or about 5 percent of the state’s total, have homes whose value is worth less than their mortgage balance, according to TRW REDI Property Data.
“Many people, especially those who bought at the high end of the market, are in a situation called `upside down’-they owe more than their homes are worth and there is nothing they can do about it,” said Bruce Hahn, president of American Homeowners Foundation, a Virginia-based nonprofit education and research organization.
How does the falling value of home equity relate to consumer spending? Simple.
At one time, American’s could count on their homes, often a household’s largest single asset, to appreciate rapidly and provide funds for a child’s college education, retirement, a new car, an addition to the house and other large expenditures.
They did this by borrowing against the equity in their homes through second mortgages. Many believed, or hoped, their homes would continue to appreciate in value so that when they sold the proceeds would be more than enough to pay off all debt.
Now, home values are rising much slower, if at all.
Many consumers are no longer able, or are hesitant, to tap the equity in their homes for the purchase of big-ticket goods like they did in the 1970s and 1980s.
The situation doesn’t bode well for the economy, which depends on consumer spending for two-thirds of its growth.
“When consumers see a substantial loss of wealth, they tend to transfer assets from real assets to those that go up in price, such as financial assets,” said Dean Witter economist Carson.
Consumer spending has risen an average of just 0.45 percent a month in the 1990s, compared with 0.65 percent in 1980s.
In the 1970s consumer spending rose an average of 0.82 percent a month and 0.54 percent in the 1960s.
Being “upside down” is hardly the situation people with little or no equity in their homes expected to be in just a few years ago.
Between 1975 and 1985, the average price of a home more than doubled, rising about 9 percent a year, according to the National Association of Realtors.
Starting in the early 1990s, the economy took a turn for the worse.
Home values took it on the chin, rising just over 4.5 percent a year before inflation, between 1985 and 1994.
A weak residential real estate market undermines consumers’ confidence about their financial status and directly affects consumer spending, Carson said.
When someone sells their house now they have less left after paying off the mortgage to buy a bigger house with more furniture, spend on family and friends, or to invest.
“They don’t have the same firepower,” Carson said.
While Karen Benton’s case may be an extreme example, consider 34-year-old Richard Murdock.
The truck driver recently pulled his Los Angeles house off the market after listing it at $170,000 for five months.
Potential buyers were offering just $130,000.
“I’m not going to take a $40,000 bath,” he said.
Nor is he buying another house and filling it with new furnishings, two key ingredients in a healthy economy.
Southern California isn’t the only spot where homeowners are in a bind.
“We have the best stable of listings in years, but you can’t sell the big-ticket homes,” said Joe King, a real estate agent with Long & Foster in Chevy Chase, Md.
“People aren’t trading up.”
Even in the prosperous Washington suburbs, anyone who bought a home in the late 1980s with little money down has the potential to be “upside down,” King said.
If Carson’s theory is correct that shrinking home equity is keeping a lid on consumer spending, then the economy could be headed for a rougher ride than many industry professionals expect.
A majority of economists expect economic growth to accelerate this summer and autumn, as lower borrowing costs encourage spending.
But if the housing market remains cool, it’s unlikely the economy will grow as fast as it did during the 1980s, with consumers holding the line on spending.
So far, there is little to suggest a housing revival.
Even with mortgage rates near all time lows, the number of new vacant homes is at the highest level in five years, according to the Commerce Department.
That kind of backlog could mean that the Karen Bentons of the country never recover from being upside down.
