I came across this interesting post on the indirect effect of sub-prime lending practices on consumer spending via the MSN Message Boards:
The Sub-Prime Debacle Will Stall Revenues for Retail Companies
1. the sub-prime debacle is making it harder to get credit for those that don’t deserve credit (what a concept).
2. a lot of home owners were feeling pretty well off with the price of their new homes taking off and then they were using that home equity to buy more stuff. Now those same home owners are feeling pretty poor these days with their mortgages worth more than the price of their homes. This is going to trickle down to non essential consumer goods first….. all that hi-end expensive label clothing.
Any opinions? what am i missing?
Undoubtedly, many sub-prime borrowers will have their meager credit loans destroyed, and we will experience a subtle decline in consumer spending. The most difficult aspect is when will the retailers experience this decline? My prediction is slightly during the summer, but ultimately the holiday season will be extremely lackluster.
Think about last Christmas? Lower gas prices, higher interest rates, and a thumbs up from Ben Bernanke drove this country overboard. Without credit cards, many Americans lack enough savings to cover their expenditures. It’s kind of sad when you think about it.
The Real Estate ATM Machine Is Out of Order
As for home owners who milked their homes for all the equity it was worth, they will be forced to decrease their spending as well or open new lines of credit. Either way, their temporary home piggy bank has dried up. So what happens when one piggy bank dries up? If you haven’t learned your lesson, you will raid another cash source – credit cards. It will be interesting to see how 2007 plays out in terms of consumer spending and savings rates.
2007 Retail Stock Plays
With in doubt, I always go with value stocks because soon enough investors will uncover your hidden stock gem. Companies like Wal-Mart, and Home Depot will continue to earn profits, even when consumer spending decreases. Go with retail stocks that you can purchase at a nice discount. Remember: When the Dow Crashed on February 27th, did any companies change? Value remained the same, but stock prices fell. I’ll use the same methodology once the retailers face the bad news.
While his background is mostly related to trading stocks, he recently gained interest in real estate crowdfunding with Fundrise.