An ATM That's Out of Money

Amy and Paul Woodhull, left, pour wine for neighbor Alison Feighan outside their D.C. home as their children play. The Woodhulls' home used to be a ready cash source, but now, Amy says, "I can't refinance again. Rates aren't falling." (Photos By Ricky Carioti -- The Washington Post)
By Nell Henderson
Washington Post Staff Writer
Wednesday, May 30, 2007

For a long time, Paul and Amy Woodhull's house on Capitol Hill was a honey pot. Through multiple refinancings over nearly a decade, they pulled out money to fix it up, buy a car, pay down credit cards, buy three other properties and improve them, too.

Now the pot is dry. The Woodhulls are feeling squeezed by bills, but with interest rates up and home prices down, they're reluctant to touch their home equity again. They called their six children into a family meeting recently, and Amy laid down new rules: No more impulse purchases or frivolous shopping trips. "We're going to have to save our pennies," she declared.

That seems to be the new motto in many an American household.

For years, as the bull market in housing gathered steam, people used their homes as glorified ATMs, pulling out money for all sorts of reasons. The trend helped support continued economic growth and recovery from the 2001 recession.

But now people 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.

The gloomier analysts predict the overstretched consumer will soon pull back sharply, no longer able to tap rising home equity to make up for lackluster wage growth, rising debt-service costs and gasoline topping $3 a gallon.

In this scenario, rising home foreclosures and tightening lending standards will prolong the housing downturn. As consumers and businesses curtail spending, unemployment is expected to rise above 5 percent by year-end from a low 4.5 percent now.

"The consumer has been spending beyond his means and is now on the ropes," said economist Nouriel Roubini, chairman of consulting firm Roubini Global Economics. His warnings have been dismissed by many mainstream economists, but he turned out to be right last summer when he predicted a more severe housing slump than commonly expected. Now, he said, "I see a quite significant chance of recession, well above 50 percent."

But many other economists, including those at the Federal Reserve, are not quite as worried. They think the surge in home sales and prices earlier this decade boosted consumer spending on the margins. Meanwhile, the primary drivers of consumer spending are employment and income growth, which have held up over the last year, they say.

Consumer spending did slow in the first quarter, but to a strong 3.8 percent annual rate of increase from a torrid 4.2 percent pace at the end of 2006. Now many analysts expect consumer spending to lose steam, likely rising at a pace below 3 percent in coming months. That would hold economic growth to a moderate pace, but wouldn't be a severe enough pullback to pitch the nation into a recession, they say.

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