Sep 18, 2013 Philip Burgess
In the years following the economic downturn, consumer spending levels eased, as many Americans saw the value of their homes decrease. But, now that appreciation is strong, and millions are returning to positive equity, household wealth may increase and boost future spending.
Generally, as consumers shell out more money, borrowing activity follows suit, which is why short term lenders may want to prepare for higher demand in the coming months.
During the second quarter, 2.5 million homeowners returned to positive equity, potentially helping boost spending power. According to analysis by CoreLogic, this brought the total number of homes with equity in the U.S .to 41.5 million.
"Equity rebuilding continued in the second quarter of this year as the share of underwater mortgaged homes fell to 14.5 percent," said Dr. Mark Fleming, chief economist for CoreLogic. "In just the first half of 2013 almost three and a half million homeowners have returned to positive equity, but the pace of improvement will likely slow as price appreciation moderates in the second half."
Strong home price appreciation supporting Americans
The main reason so many homeowners have been able to get above water on their home loans is the fact the home prices are surging.
More Americans may return to positive equity in the third quarter, with the July CoreLogic Home Price Index report revealing a 12.4 percent year-over-year increase and 1.8 percent monthly bump.
"Home prices continue to climb across the nation in July with markets hit hardest during the downturn leading the way," said Anand Nallathambi, president and CEO of CoreLogic. "Nationally, home prices are now within 18 percent of their peak levels reached in April of 2006."
Appreciation is expected to continue when August's figures are released, with CoreLogic's Pending HPI projecting a 12.3 percent annual jump and a 0.4 percent month-over-month gain.
Why does short term lending demand rise with spending?
When consumers increase expenditures, short term lending may pick up because they are putting themselves at risk should unexpected expenses arise. For example, buying a new car just before a surprise trip to the emergency room could put people in a financial bind.
In such a situation, it may be difficult to come up with the funds to cover monthly essentials, which could put consumers at risk of incurring late fees and penalties. To avoid these charges, short term lending could come in handy. In a time of need, this type of loan can get people money fast to pay their bills.
But, short term loans have come under fire recently, especially in New York, where regulators say the high interest rates charged exceed the Empire State's cap of 25 percent annually. However, the amount of interest paid during the one- to two-week loan term is often much less than what consumers would have to pay in late fees if a payment is missed, which makes these types of loans beneficial for certain consumers.