MBA Study Suggests Homebuyers Will Remain Hesitant for Years to Come

Accordingrnto a study commissioned by the Mortgage Bankers Association (MBA) analyzes how Americans will respond to the current crisis in terms of consumer spending, saving rates, credit supply and implications for the strength of the economic recovery.

The study entitledrn”Household Reaction to the Financial Crisis:  Scared or Scarred?” found that thernhigher unemployment rate for Americans aged 16 to 24 could have a lasting impactrnon that generation's lifetime earnings and attitudes toward risk and socialrnpolicies.  Meanwhile, many of theirrnparents and grandparents are delaying retirement or reentering the workforce inrnan attempt to rebuild nest eggs that were wiped out by the economic collapse.  

Thernstudy, conducted for The ResearchrnInstitute for Housing America a 501(c)(3) trust fund established by MBA, wasrnled by Professor Joe Peek, Gatton Endowed Chair in International Banking andrnFinancial Economics at the University of Kentucky. 

“While Americans, andrnthe American economy, are noted for their resilience, the current financialrncrisis and recession exceeded the devastation created by other post-World WarrnII recessions,” said Peek.  “Saving rates have risenrnsubstantially and many Americans will continue to cut their spending sharplyrnout of necessity, others out of fear of what the future holds.  Since consumerrnexpenditures account for about two-thirds of GDP, we are facing thern”paradox of thrift” as households try to rebuild their net worth,rnwith the reduced spending likely to delay and weaken the recovery from thern'Great Recession'.” 

Peek said that it isrnunlikely that the dramatic increase in loan delinquencies, home foreclosures,rnand bankruptcies will change because employment and home prices are likely tornremain depressed and ongoing problems with loans will restrain banks' willingnessrnand ability to provide credit. 

 “Unfortunately, we face the possibilityrnof being caught in a vicious circle,” Peek said.  “The cutbacksrnin consumer and business spending are likely to contribute to a more anemicrnrecovery.  In turn, we will likely see a deepened and prolonged weaknessrnin consumer and business spending, further undermining the recovery.  Thernlonger the malaise in economic activity continues, the more likely thatrndiminished spending persists, adversely affecting future economic growth andrnthe standard of living.  Such headwinds to a strong economic recovery arernlikely to have lasting impacts on the values and behavior of the currentrngeneration, much as the Great Depression had on its generation.”

The study found that thernusual estimates of the “wealth effect,” which measures individuals'rnpropensity to consume out of total household wealth are in the range of 3 to 18rncents but the effect is “now operating in reverse” resulting inrnreduced consumer spending. At the same time the 20-year downward trend inrnpersonal savings has also reversed, probably because of large capital losses onrnhousehold assets and as a reaction to economic uncertainty.

The study states thatrnunderemployment is much higher than the reported unemployment rate and thernlength of jobless spells are getting longer. rnIn reaction, people are delaying retirement while trying to increase retirementrnsavings. Employers have been shifting full time employees with benefits to partrntime and contract status.

People entering the labor force duringrnrecessions have lower lifetime incomes according to the report.  Thosernunable to find work today are going to be competing with a new crop ofrngraduates in a few months for a still limited set of job openings. rnWithout a reasonably rapid recovery in employment, at this point an unlikelyrnscenario, there is a risk we will create a “lost generation” that mayrnnever catch up.

Credit supply and demandrnhave both been impacted by the financial crisis and reactions to it. Banksrnremain in weak financial health, and thus are unlikely to increase creditrnsupply by a substantial amount in the near term while many individuals' creditrnratings are damaged to a point that will hinder their access to credit for yearsrnto come.

Credit underwriting andrnpricing models developed with data from years prior to this crisis were heavilyrninfluenced by prior experience with moderate macroeconomic volatility; Peeksrnspeculations that this downturn will likely play an outsized role in creditrndecisions over the intermediate term.

Michael Fratantoni, MBA'srnVice President of Research and Economics added, “The severity and durationrnof the most recent downturn far exceeds what we have experienced in pastrnrecessions and has resulted in the disruption of millions of lives.  Werncan't know for certain at this point, but it is more than reasonable to preparernfor a world that has been irrevocably changed by this experience.  For thernmany reasons discussed in this study, we should expect hesitant homebuyers,rncautious businesses, and conservative lenders in the years ahead.”

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