Americans Learn To Feed Piggybanks As Larger Down Payments Are Required

The American housing crisis may accomplish what years of parental hectoring couldn't: Turn Americans from spenders into savers.

Spending will fall because homeowners can no longer use rising real estate values to borrow cash — $837.5 billion in 2006, according to a report by former chairman of the Federal Reserve, Alan Greenspan, and senior Fed economist James Kennedy. With mortgage lenders requiring down payments of 20%, the average household, which puts away less than 1% of after-tax pay, will have to save 10% for 10 years to buy a home.

The housing market shaved almost 1.6% off gross domestic product growth in the first quarter and cut in half the growth rate of consumer spending, which accounts for more than two-thirds of the economy, the chief economist at Moody's Economy.com in West Chester, Pa., Mark Zandi, said.

"The loss of housing wealth is the difference between a recessionary economy and a growing economy," Mr. Zandi, an adviser to presumptive Republican presidential nominee Senator John McCain, said. "Consumers have powered the global economy for the past 25 years. For the foreseeable future, maybe the next 25 years, the savings rate will move higher."

The worst housing crisis in at least a quarter century still has a long way to go, Mr. Zandi said. It will take until 2015 for the median home price to return to its July 2006 peak of $230,200, while home sales and residential construction will never again reach the record highs of 2005 and 2006, he said.

Lenders will issue 53% fewer purchase mortgages this year than in 2006, making home sales difficult and delaying a housing recovery, the publisher of industry newsletter Inside Mortgage Finance in Bethesda, Md., Guy Cecala, said.

Getting a home loan may also be made more difficult by plummeting investor confidence in Fannie Mae and Freddie Mac, which own or guarantee 81% of the mortgages issued this year, according to the Washington-based Office of Federal Housing Enterprise Oversight.

Fannie Mae, the largest American mortgage finance company, and Freddie Mac, the second-biggest, have both lost more than 50% of their market values since July 7.

"You've never seen the mortgage industry this passive in lending in the past 50 years," Mr. Cecala said. "They don't want any more missteps creating any more losses. The flip side is it's not helping anybody stay in homes or buy homes. You can't have a housing recovery without financing."

The residential housing decline will "change the structure" of the American economy by forcing Americans to save, the chief economist at Credit Suisse Group in New York, Neal Soss, said.

"The days of wine and roses are over," Mr. Soss, who worked at the Federal Reserve for former Chairman Paul Volcker in the 1980s, said. "We were drunk on money. Getting sober is a painful process."

Consumer spending, which rose 7.5% since the beginning of last year, will fall into negative territory after Americans run through their tax rebate checks this summer, the chief economist for the Madison, Wisc.-based Credit Union National Association, Bill Hampel, said.

American consumers spent at a record annual rate of $10.2 trillion in May, in part helped by the federal rebates, according to the Commerce Department. That won't last, the president of Beacon Economics LLC in Los Angeles, Christopher Thornberg, said.

"Throwing out a stimulus check does nothing but put off for a brief period of time the inevitable," Mr. Thornberg said.

Two years ago, lenders made $2.7 trillion in mortgages, $600 billion to subprime borrowers with bad or spotty credit histories. Now, financial firms, responding to $415 billion of real estate-related writedowns and credit market losses, are forcing even the most creditworthy buyers to make higher down payments.

Sixty percent of lenders said they made it more difficult for the most qualified buyers to secure financing in the first quarter, according to a Federal Reserve survey.

"The mortgage industry always works like a pendulum," the vice president for marketing at RealtyTrac Inc., an Irvine, Calif.-based foreclosure database, Rick Sharga, said. "Two years ago they were giving loans to anyone who could fog a mirror. Now you need perfect credit and a significant down payment."

Tougher lending guidelines are more prevalent in areas such as California and Florida where home prices have fallen the most, a mortgage planner with Alpha Mortgage Corp. in Wilmington, N.C., Chris Hutchens, said. Loans with a 3% down payment from the Federal Housing Administration are available in his area, where home prices are more stable, he said.

"Banks are tighter than they were, so you have to work harder to get the loan you want," Mr. Hutchens said. "It's in the declining markets where it's more difficult."