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High consumer confidence levels could boost borrowing

Aug 21, 2013 Philip Burgess

Consumers are the driving force behind borrowing, and with Americans feeling confident in the economy and their personal financial situations, short term lenders may want to prepare for increased demand.

Despite the fact that confidence dipped in early August, consumers are still optimistic. The Thomson Reuters/University of Michigan preliminary reading on the overall index on consumer sentiment fell to 80 from 85.1 in July.

While Americans expect economic growth to ease a bit, survey director Richard Curtin said the majority believe expansion will continue, with rising home values keeping consumers confident.

Some experts fear that rising mortgage rates could hurt the housing market's momentum and, in turn, the overall economy, but Chief U.S. Economist Paul Ashworth told Bloomberg he doesn't believe that will be the case.

"Interest rates are going up a little bit, that never helps," Ashworth said. "But we still have the background of what looks like a still-improving housing market."

Rising home prices aiding confidence
Part of the reason consumers are feeling better about the economy and their own finances is the fact that home prices have been on the rise.

More than 100 forecasters predicted home values would end the year up an average of 6.7 percent, which could further fuel consumer sentiment, according to the latest Zillow Home Price Expectations Survey. In the coming years, appreciation is expected to continue, with gains of 4.4 percent, 3.6 percent and 3.5 percent in 2014, 2015 and 2016, respectively.

"Short term expectations for home value appreciation through the end of this year are consistent with a nationwide housing market recovery that is both strengthening and widening, but still coping with high levels of negative equity, high demand and low inventory," said Zillow Senior Economist Dr. Svenja Gudell. "Combined, these factors will continue putting upward pressure on home values for the next few months."

Strong employment situation a good sign for consumers
In addition to higher home prices, the jobs market has also been a driving force behind consumer confidence.

July proved to be another strong month with the U.S. nonfarm private sector adding 200,000 new positions, according to the ADP National Employment Report. Small businesses continued to lead the way at 82,000 jobs, followed by medium and large companies.

"Job growth remains remarkably stable," said Mark Zandi, chief economist at Moody's Analytics. "Businesses are adding to payrolls in most industries and across all company sizes. The job market has admirably weathered the fiscal headwinds, tax increases and government spending cuts. This bodes well for the next year when those headwinds are set to fade."

With Americans feeling more secure in their positions, they may be more willing to spend money, potentially leading to a higher level of borrowing activity.

Why short term lending?
As consumers continue to feel more confident, spending could pick up in the coming months, which may also lead to additional borrowing. One form that may increase is short term lending. These types of loans have gotten a bad rap in the past, and are currently under attack in New York, but they can be beneficial to consumers.

For instance, with the economy improving, consumers might begin to spend more money, leaving them with less cash on hand. Should people run into unexpected expenses that lead to them falling short on other essential expenses, they could have some financial troubles.

However, with a short term loan, consumers are able to obtain funds to help cover their credit card bills and rent while paying for an unexpected medical expense or car repair.