Two reports today from a couple of major national newspapers examine the nation’s housing market in light of two huge trends that helped shape the economy for the past several years.

The Washington Post takes this look at the drying-up wealth effect. Homeowners were quick to refinance, refinance, and refinance again while home values were appreciating rapidly in order to take advantage of “free cash.” Now, with values just creeping up, stagnating or falling, the wealth effect is nowhere near the levels it reached in recent years.

In a story called “An ATM That’s Out of Money,” the Post profiles a Capitol Hill family that used refinanced mortgages over the course of 10 years to fix up the house, purchase a vehicle, buy and fix up three other properties and pay off credit cards. Now they say they’ve got to rein in their spending, because the “free money” is drying up.

And that family is not alone:

[P]eople are reining in their spending, raising concern that their collective decisions could nudge a sluggish U.S. economy into recession.

Already, a small slowdown in the growth of consumer spending and a big plunge in home construction helped cool U.S. economic growth to a weak 1.3 percent annual rate in the first three months of this year. The nation’s retail sales fell in April, and many retailers are reporting disappointing sales so far this month.

Economists are dividing into two camps: the highly pessimistic and the slightly pessimistic.

And The Wall Street Journal featured on its front page today a story (free access) of fallout from the subprime loan crisis. Many borrowers who were previously unable to take out home mortgages were given the opportunity to so and are now losing their homes to foreclosure at an elevated rate.

In Detroit:

Over the past several years, seven of the 26 households on the 5100 block have taken out subprime loans, typically aimed at folks with poor or patchy credit.

Some used the money to buy their houses. But most already owned their homes and used the proceeds to pay off credit cards, do renovations and maintain an appearance of middle-class fortitude amid a declining local economy. Three now face eviction because they couldn’t meet rising monthly payments. Two more are showing signs of distress. …

The borrowers’ difficulties raise questions about how the extension of easy credit to large swaths of the U.S. population will ultimately affect people and the broader economy — questions that have gained in urgency as a sharp rise in defaults has policy makers wondering what, if anything, they can or should do.

KELLY BENNETT

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