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As Federal Reserve meets, folks should trim spending

By PETER MORICI, UPI Outside View Commentator   |   June 18, 2013 at 12:06 AM   |   Comments

COLLEGE PARK, Md., June 18 (UPI) -- The Federal Reserve is expected Wednesday to indicate when and how quickly it will pull back from its easy money policies. Americans can expect mortgage rates to climb, selling homes to get tougher and interest rates to increase on credit cards, auto purchases and home equity loans.

The Fed has been purchasing $85 billion in mortgage-backed securities and longer term Treasury bonds. Economists call this Quantitative Easing.

These purchases have fueled, until recently, rock-bottom mortgage rates and a much-heralded surge in housing prices. The latter could well prove unsustainable, because Wall Street speculators have been doing a lot of the home buying, even as the demand for home ownership is the United States is actually waning.

More Americans are choosing to rent. Many young families, saddled with huge student debt and earning less than their parents, can't consider purchasing a piece of suburb heaven.

The Zillow Survey of 105 economic forecasters, in which I participate, has the surge in housing prices slowing significantly in 2014 and 2015. This deceleration could turn into a housing market collapse if the Fed pulls back on easy money too quickly and many more homeowners could owe more than their homes are worth.

Car sales and prices have been booming, as Ford, GM and others have offered customers with good credit scores quite reasonable rates on new car loans. Their financial affiliates will face much higher costs for funds and automakers will have to pass along higher interest rates to customers and trim incentives.

If you genuinely need a new car, this may be the best time to get that good deal on financing. Especially because auto loan rates will hit the used car market hard, lowering your trade-in value.

Stock prices have soared. Investors can't get much interest on bonds and dividend yielding stocks have been the best alternative. As the Fed pushes up interest rates, well-rated corporate bonds and the debt of the better-run state governments will become attractive and stocks, especially dividend-paying stocks, will lose their appeal.

Overall, the stock market will be challenged to continue rallying and ordinary investors should greet with great skepticism broker calls about can't miss opportunities. Most stock prices move with general trends in the market and the opportunity your broker hails will have to be so good that it won't likely be offered to ordinary retail investors. The big shots on Wall Street will keep those hot prospects for themselves and the carriage trade -- families big enough to be companies in their own right.

Recent retail sales reports indicate the average family has been abandoning caution. The percentage of household income devoted to saving, never high in America, is now lower than a snake's belly.

This is a good time to rethink the family budget. If you have credit card debt, pay it down as quickly as you can.

If you really need a larger home and are confident you can sell the home you own and your job is very stable, this may be the best time to buy and lock in a mortgage rate you may not see again for a long time.

If you really need a home improvement loan -- for example, much needed repairs you can't do yourself or another room for the twins that unexpectedly arrived -- now is the time.

Don't borrow that money for a bigger SUV than you need or don't need at all, or another wide-screen TV. Sedans, older vehicles and smaller monitors will be cool again when interest rates surge.

It's time to reflect on the lessons of the Great Recession. Families that are thrifty and only use credit for good purposes keep their homes from foreclosure, send their kids to college -- without piling up excessive debt -- and sleep better at night.

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(Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist. Follow him on Twitter: @pmorici1)

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(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)

© 2013 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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