The Motgage Equity Sqeeze is here

It seems that the squeeze put on consumers by the recent credit tightening and home price ~~stabilization~~ drop has started in earnest. While there are some who question the impact of mortgage equity withdrawal (MEW), it is pretty clear that MEW and the recent decline in access to it has been a huge part of the consumer spending boom.

In two recent posts on separate topics the convergence of this issue is becoming clear. One, from California Housing Forecast highlights the increase in personal consumer credit use last quarter and the reasons behind that surge. Shahrzad Berkland, analyst at CHF, quotes Peter Schiff, author of Crash Proof:

This week we received new data that illustrates how big of a financial hole U.S. consumers are digging. Despite disappointing sales from major retailers such as Target and Circuit City, first-quarter profits at MasterCard surged 70% to a record $214.9 million following a 19% jump in transactions.

I believe it is clear that millions of Americans have been living well above their means and this implosion of cheap credit and cash via refinancing is going to have a much more dramatic impact on the economy than first predicted.

A strong indicator of the lack of MEW’s impact on consumer spending can be seen in this post from Calculated Risk, which outlines the major decline in retail sales in April (from a recent MarketWatch article):

April was largely a sales disaster for most of the nation’s largest retail chain stores.
…
With more than three-quarters of retailers reporting to Thomson Financial, 86% of them missed expectations for same-store sales, the industry’s benchmark for growth measured by receipts rung up at stores open longer than a year.

I believe that the picture of a weakening economy based on the collapse of cheap cash provided by MEW is coming in to sharper focus every month. It should be come clearer this summer – where its headed and how fast will be the important questions that need answers.