Consumer Attitudes Affected by Fiscal Cliff and Debt Ceiling Talks

The numbers keep coming in showing that the housing industry has made a turnaround in the past year and is in the midst of a recovery. So much is depending on this recovery that even the Feds are looking at housing as a means of helping the entire economy and boosting employment. Unfortunately, there are always some events that may happen to slow things down when dealing with a fragile economy and recovery.

The Thomson Reuters/University of Michigan's preliminary January reading of consumer sentiment was released last week and was for the most part disappointing. The index came in at 71.3 which is down from 72.9 in December. This reading was the lowest since December of 2011 and much lower than economists' expectations of a rise to 75. Consumer sentiment is a measure of consumer reactions and attitudes to their personal finances, spending and business climate. This drop was attributed to the fiscal cliff negotiations which took place until the very last minute.

The U.S. has already received a warning from Fitch that a delay in raising the debt limit could result in a downgrade to U.S. credit. The Federal Reserve Chairman, Ben Bernanke, has also urged lawmakers to avoid a default by lifting the ceiling. When consumers hear these things, they react and worry about their own finances. This often reduces their spending, especially with major purchases such as a home. Today, the House unexpectedly agreed to extend the debt limit until May.

Even home builder confidence has stalled according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). The HMI remained steady in January at a level of 47 as builders are still concerned over tight credit conditions. Home sales have helped to improve the economy, according to the recent Fed's Beige Book, but unemployment still remains stubbornly high, another concern for consumers. Government refinance programs continue to help the housing industry, as well as, stabilize home prices. According to CoreLogic, a data and analytics company, at the end of the third quarter 2012, 17.1 million borrowers had qualifying loan to values between 80 and 125% for the HARP refinance program under the original requirements which were first introduced in March of 2009. With the removal of the 125% LTV cap through HARP 2.0, the door to another 4.6 million borrowers was opened. While negative equity continues to fall according to the CoreLogic data, more than a quarter of homeowners who have a mortgage remain in a negative equity position. The number of underwater homeowners fell by approximately 100,000 in the third quarter of 2012. At the end of the first three quarters of 2012, 10.7 million homeowners still remain with negative equity (22% of all mortgage holders). Many of these homeowners are not able to refinance through HARP or the FHA streamline, the two popular programs for refinancing underwater mortgages. An expansion of these programs, which has not been approved, could further help the housing industry, homeowners and the overall economy. Refinancing to lower mortgage rates allows consumers to save money that can be used for other things which feeds the economy.

While housing starts surged 12.1% in December, according to the Commerce Department, it was multi-family units which were up the most at 20.3%. Single family residences were up 8.1% and housing permits for future construction were up 1%. While these numbers are promising, they also reflect that more single residence homeowners may be refinancing and staying put instead of moving to a new home. As home prices are rising due to low inventory, more homeowners are now moving into positive equity. According to CoreLogic, a data and analytics company, 100,000 additional borrowers reached a state of positive equity during the third quarter of 2012. During the second quarter of 2012, more than 1.3 million borrowers moved into positive equity. The total number of borrowers who moved from negative to positive equity as of the end of September 2012 was 1.4 million. The availability of historically low mortgage rates has sent many homeowners to refinance with many of them choosing shorter term loans which help to gain equity faster.

The housing market remains very fragile and will continue to go through ups and downs this year. Whether it produces enough jobs, is yet to be seen. In the meantime, homeowners should look to take advantage of any program that is available to them, as well as, rock bottom mortgage rates that may never be seen again.

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