For months it has largely been assumed that the ongoing housing market corrections would ultimately play out in the consumer spending arena - perhaps even leading to recession. The logic seemed sound: homeowners, grown accustomed to writing a check on the HELOC account to pay for their new cars and vacations, would slowdown spending in the face of both higher interest costs on their HELOC and stagnant equity growth in their homes.

But the Wall Street Journal (10/02/06) now reports that the home equity driven spending apparently is not the lynchpin of consumer behavior it was thought to be:

“A year into the housing market’s slowdown, Americans have yet to snap shut their wallets, defying predictions that the cooling market would have a chilling effect on consumer spending.”

While less money is being extracted from home equity than in the recent past, other factors including rising stock prices, falling fuel prices and good employment figures are helping to fill the void.

The article cites some interesting and positive (if little known) statistics about HELOC spending habits that are worth repeating:

• A recent survey done for Deutsche Bank Securities found that homeowners spent only about 14% of the money they cashed out of their homes - and that didn’t go back into their real estate investments - on consumer goods. The rest was either used to make other investments or to repay debt.
• The overwhelming majority of mortgage debt and home equity loansare held by Americans in the upper half of the income range. The top 10% of wage earners hold 42% of total home-equity credit lines, according to data from the Fed’s 2004 Survey of Consumer Finances. Thise affluent consumers have already racked up sizable gains in the value of their homes in recent years and can most likely afford to weather a modest pullback without cutting back their spending.

Technorati Tags: housing market, HELOC, Deutsche Bank Securities, Survey of Consumer Finances

That the nation’s housing market has slowed dramatically is old news. Housing starts are at their lowest levels since the early 90’s and home listings are up two to three times last year’s levels in many markets.

The Wall Street Journal now reports that the news is especially bad for Midwest states - areas that never even experienced the housing boom that other parts of the country did:

“For months, the biggest worries over the slowing housing market in the U.S. have mainly focused on parts of the country that have seen exceptional price increases from 2000 to 2005, places with growing populations and strong economies such as California, Florida and Nevada. But recent data from the federal government and private-sector researchers point to areas in the Midwest that are witnessing a more dramatic slowdown in home prices and, in some cases, higher borrower defaults than the rest of the country.”

The situation will almost certainly worsen over the coming months. Automotive and manufacturing job losses will likely further depress local housing markets while pushing foreclosures higher.

Here are som points that HELOC borrowers in the Midwest should keep in mind:

• If you have a HELOC but do not currently use it, maintain it anyway. One of the best reasons to have a HELOC is to serve as an emergency fund in the event of job loss. Qualifyng for a HELOC after a job is lost is nearly impossible. Another reason to keep the account open (even if job loss is not a concern), is that if you’re in a falling market there’s good chance your home would not appraise today as favorably as when the HELOC was originally taken out.
• If you carry a large balance on your HELOC, now more than ever is the time to make an extra effort to pay down the loan balance. Falling housing values also mean falling home equity margins. You do not want to find yourself being financially underwater - i.e. your mortgage plus any home equity borrowings exceed the market value of the home. Moreover, the steep rise in interest rates over the past year should be added incentive to pay down HELOC balances.

Technorati Tags: housing market, Housing starts, Midwest, HELOC