Home equity loans tapped out?

In every holiday shopping season from 1995 through 2005, Christmas was on the house.

Not this year.

The housing downturn that started last year and has accelerated this year has barred the chimney to Santa in many homes, as owners find they no longer have the growing equity that can be tapped again and again to finance spending.

Preliminary figures for sales on Black Friday, the day after Thanksgiving, were mixed. Market watcher ShopperTrak RCT said sales per person were down 3.5 percent compared with a year earlier. But overall sales totals rose 8.3 percent.

Financial firm UBS said sales were on track for the weakest performance since 2002.

"People have been using their home as a very large ATM for a number of years," said Keith Leggett, senior economist at the American Bankers Association in Washington. "With housing values declining, rising defaults and greater concern about excess of risks, clearly we've seen banks pull back on underwriting. They've tightened their terms of credit."

The shift is one of a number of factors, from changes in household income to rising oil prices to changes in consumer mood, that will play a role in spending decisions.

"It's part of a larger picture, where, if a family is stretched and they have exhausted their resources for borrowing, then some people are hitting the wall," said Joe Belew, president of the Consumer Bankers Association, a banking trade group based in Washington. Still, he questioned whether home equity will be a deciding factor in Christmas retail sales.

"I don't think you go to the department store and buy a pair of shoes on your home equity line of credit," Belew said.

In years past, home equity loans often were tapped to pay down credit-card balances, which could embolden shoppers to be free with the plastic.

In 2005, nearly $144 billion in money mined from home equity was used to pay down non-mortgage debt. That figure was nearly double the total used to tamp down consumer credit balances in 2002, according to estimates in a recent study by former Federal Reserve Chairman Alan Greenspan and Fed economist James Kennedy.

Even families with good credit ratings this holiday season may notice a change in their borrowing power.

Equity lending shrinking

"It's been a sea change in consumer lending," said Scott Anderson, senior economist at the Minneapolis office of Wells Fargo & Co. "Equity loans were growing at 40 to 50 percent rate." Now they're contracting, he said.

In the third quarter, consumers took an estimated $60 billion in cash from home equity loans, down 26 percent from three months earlier, according to Freddie Mac, a federally chartered home mortgage company.

"Recent events in financial markets may make it harder for some borrowers to qualify for cash-out refinancing, and declining home values will also limit options for some borrowers," said Amy Crews Cutts, Freddie Mac deputy chief economist, in a statement that accompanied the survey.

On the other hand, Cutts noted that home equity remains a vast pool of wealth, with aggregate home value still far above what it was only a few years ago. Homeowners "have about $10 trillion in home equity available, according to the Federal Reserve Board," she said.

One thing is clear: For the first time in more than a decade, ready cash from home financing won't be fattening the wallets of shoppers prowling the mall.

For each of the years from 1995 to 2005, home equity loans financed a larger share of consumer spending than the year before, Greenspan and Kennedy found in their research.

In 2005, "equity extraction" from home sales, home equity loans and cash out refinancing generated $1.4 trillion in free cash -- money used to pay down debts, pay for home improvements and finance consumer spending, Greenspan and Kennedy figured.

That's nearly double the amount only three years earlier.

While data for 2006 are not available, experts say the trend probably held last year, before this year's reversal of fortune in the residential real estate and financial markets.

Estimates vary widely on how important home equity is to consumer spending. At the low end, economists figure every dollar change in the value of a home equates to a 2-cent change in spending. At most, every dollar change may lead to a 7-cent change in spending.

That could translate into a decline in consumer spending of $48 billion to $168 billion, equating to a drop in consumption of 1 percent to 2.7 percent, said Anderson at Wells Fargo.

Significant, but not disaster

"I think it's significant," he said. "It's not a disaster. The home price decline won't be the cause of a recession but it will limit that ability of the economy to [absorb] further shocks."

Dan Laufenberg, chief economist at Ameriprise Financial Inc., said he believes retailers will squeak by with modest gains in sales, despite the hit in home values.

"It's not a question of whether housing will be a drag on the economy, because it already is," he said. But the national economy continues to create jobs, corporate profits are solid if not spectacular and, as of the second quarter, Americans had a combined net worth $4.2 trillion greater than a year earlier.

"The wealth effect looks like it's positive, but maybe not as positive as it was," Laufenberg said.

If home equity loans become harder to get, consumers could seek recourse to an old standby -- plastic.

"What you may find is that people actually substitute back to credit cards if the home equity avenue closes down," said Leggett, at the American Bankers Association.

Mike Meyers • 612-673-1746

Mike Meyers • meyers@startribune.com