Monday, January 22, 2007 - By Paul Gores, Milwaukee Journal Sentinel
MADISON, WI (MCT) - How homeowners who have adjustable-rate mortgages cope with the coming increase in their monthly payments will play a role in whether consumer spending slows in the new year, the former chief economist for the National Association of Realtors said this month.
Economist John Tuccillo said in an address to the Wisconsin Bankers Association that with more than $1 trillion in adjustable-rate mortgages set to reprice upward this year, homeowners are looking at a 25 percent rise in the amount of house payments unless they refinance.
If the burden of bigger payments is substantial, it will be felt in the rest of the economy, Tuccillo said.
“The degree to which consumers react to that repricing by absorbing higher mortgage payments will determine how consumption spending goes for the rest of 2007,” said Tuccillo, who now runs his own consulting business. “If they have to eat large increases in their mortgages, they are going to reduce spending on other goods and services, and that is going to have an impact on the economy. It’s going to have softening impact on economic growth.”
Tuccillo also said the slump in the housing market will turn around this year because of U.S. demographics - baby boomers and their children, in particular - that include a lot of potential home buyers. He said that by the fourth quarter of 2007, housing sales and home building should be increasing again.
Sam D. Kahan, a senior economist for the Federal Reserve Bank of Chicago, who also spoke at the event, said the economy would grow more slowly than last year’s 3.3 percent pace, but that the expectation of a recession in 2007 is low.
He said there would be “weakness” in the first half of the year, “and then we grow back toward that longer-term 3 percent trend.” Kahan said the weakness would be concentrated in the housing and auto-manufacturing sectors.
“Basically, the look is for a slowdown in the economy and then a buildup toward the end of the year,” Kahan said.
Inflation should remain relatively unchanged in the 2 percent to 2.4 percent range this year, he said.
Kahan said some areas of concern include the sinking value of the dollar against foreign currencies, oil prices, and global economic and political instability. He said global political uncertainty “is just something that makes me worry more than anything else.”
(c) 2007, Milwaukee Journal Sentinel. Distributed by McClatchy-Tribune Information Services.
