We think about consumer confidence as something we can measure on the whole, but like the saying 'all real estate is local', all 'consumer confidence is personal.' What really strikes at the heart of the consumer is cash flow, with wealth a more distant second. Most consumers make their most important decisions based on short term cash flow considerations, and less often do they think in terms of long term wealth. If their house loses $50,000 in value, that is a real impact to their wealth that is fundamentally more painful that a loss of $500 a month from an ARM reset, but if you look to your personal confidence, most will agree that $500 a month has a far greater impact on your outlook, spending, and general willingness to take action. The FED is worried about consumer confidence because worried consumer reduce spending, and that creates new pressures on our economy. Much of our wealth, and our cash flow of the recent years has come from Mortgage Equity Withdrawals (MEW), and in the last measured third quarter of 2007 there was a 55% drop in loans that removed equity at the closing (meaning cash out loans), and for many even with the lowered federal interest rates we'll see some increase in housing payments, meaning less disposable income.
Consumers tend to remove equity from their house in one of two ways: selling the house or refinancing the house. Selling the house has been tracked most often to higher savings - the lump sum can be positioned in what is a one time decision for the client, whereas cash out and home equity lines take greater discipline and financial stewardship, these smaller lump sums are more quickly consumed for goods versus savings. As house prices drop, real estate sales have slowed this exchange of wealth from capital gains of real estate appreciation. Stricter lending guidelines have made it more difficult for consumers to reposition wealth already in the house, putting greater pressure on spending behavior.
We are seeing signs of life in the mortgage refinance side of the housing equation. Consumers see news on the lower interest rates from the Fed. The MBA refinancing index moved back above 4000 for the first time since March of 2004... that's a 20% jump in applications, and in just 5 weeks we see a doubling of prior loan activity. We again may see some behavioral shifts in the way the consumer views savings that comes from cash flow, cash out, or property sales as they need to think about their own liquidity. The main reason the Fed needs to lower rates (as the real impact on housing may not help the economy for some time), is the consumers increasing reliance on credit card debts (rising) and mortgage lending (decreasing)... as mortgages tighten, consumers fall back on credit and that creates a debt sprial that can be devastating... this is again a problem of behavior (overspending), or too much month at the end of their money.
Many believe 2010 is when we can expect to see housing back in full swing again, but right now there is a real opportunity to capitalize on current rate trends, and congressional politics. To imagine that I might refinance a $700k mortgage to an FHA loan, or that the government may offer tax free bonds for pools of bail out money to consumers, is pretty hard to imagine... but they are trying to avoid a bigger calamity, and many believe interest rates have no where to go but down for the next 6 months - making the 5,000 ARM resets per day all the more exciting for you and your consumer as LIBOR and PRIME become more and more attractive, and we set ourselves up again for consumers refinancing into short term lower interest rates... When will the Fed be able to tighten again if we bail ourselves out with cheap money? This time around, let's see if we can save more, spend less, and better manage our own liquidity.
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