By Liz Enochs
/www.bloomberg.com/ Derek Meyer dreamed of buying a sailboat and a luxury motor home when he put his three- bedroom house in Los Gatos, California, up for sale in July. He asked for $1.825 million -- $550,000 more than he paid in 1999.
After reducing the price five times, the 42-year-old owner of a marketing consulting company this month accepted less than $1.4 million, a 9 percent gain in three years. He scrapped plans for the boat and cut his $150,000 motor-home budget in half.
``Profit on paper is one thing and profit in your pocket is something different,'' Meyer said. ``Had the house sold at the high prices, we definitely would have taken a large percentage of that extra gain and spent it.''
From Los Gatos to Zurich, where home prices fell in the third quarter for the first time in three years, homeowners no longer can count on windfalls from sales of their residences to feed their spending habits. That may be bad news for the U.S. as well as European and Asian countries banking on consumer spending to maintain or revive growth.
``You don't have the increase in wealth going on that tends to stimulate more spending'' when housing prices ebb, said Lyle Gramley, senior economic adviser at Schwab Capital Markets and former U.S. Federal Reserve governor. The result will be ``slower consumer spending going forward.''
Cooling Off
In industrialized countries, consumer spending accounts for about 61 percent of gross domestic product on average, according to the World Bank. In the U.S., consumer spending has helped sustain growth while shoppers' reluctance to buy has contributed to stagnant economies in countries such as Germany and France.
U.K. prices at the top end of the housing market are declining after rising every year since 1993, while average home prices in the U.S. rose 6.2 percent last quarter from the year- earlier period, less than in previous quarters. Prices are falling or growing less rapidly in Asian markets such as Korea and Singapore as well.
Prices are declining in some parts of the U.S., such as San Jose, California, where they slipped 0.4 percent in the third quarter from the year-earlier period, according to the Office of Federal Housing Enterprise Oversight. In Austin, Texas, where prices rose 45 percent in the past five years, gains slowed to 1.2 percent in the quarter.
Demand remains robust in some U.S. markets: In Long Island, New York, prices jumped almost 15 percent in the third quarter and they climbed 13 percent in San Diego.
Prices and Spending
Consumer spending rises as home prices increase and owners sell or borrow against the higher value. Housing prices are ``very important, particularly for middle-income owners,'' said Ian Morris, chief U.S. economist at HSBC Securities Inc.
`Your average Joe Blow has much more wealth tied up in housing than stocks,'' he said. Tip that balance, and ``we've got a slog ahead of us.''
The lowest interest rates in decades -- 41 years in the U.S. and 38 years in the U.K. -- along with rising incomes and investors' moves into real estate as an alternative to slumping stock markets have fueled housing demand around the globe.
From 1995 to 2001, inflation-adjusted home prices rose 70 percent in the Netherlands, 60 percent in Ireland and 42 percent in the U.K., according to a September study of six countries by the Bank for International Settlements. In South Korea, prices unadjusted for inflation have risen almost a third this year, according to the central bank, which cut interest rates to a record low last year.
Luxury Homes
U.K. house prices rose at an annual rate of 29 percent in November and 31 percent in October, the strongest since price growth last peaked in 1989, according to HBOS Plc, Britain's biggest mortgage lender.
Now, luxury homes are showing the first signs of a slowdown. In the U.K., house prices above 1 million pounds ($1.58 million) have fallen 5 percent this year and prices above 5 million pounds have dropped 10 percent.
``Bonuses have been negligible and many of the big City firms have made large numbers of redundancies,'' said Rupert Sweeting of London real-estate services company Knight Frank.
Other markets are much the same. With the French economy slowing, home prices in Paris rose 7 percent in the first half of this year, trailing gains of 9 percent last year and 10 percent in 2000.
``What we are seeing is the luxury end of the market tailing off in Paris,'' said Caroline Carely, head of the Chamber of Notaries' department that monitors the Paris region's property market. ``The slump in the stock market has wiped out the kinds of profits potential buyers were planning to use to purchase expensive homes.''
Middle Market
Some sellers of middle-market houses also are hurting. Mark Allen, a corporate financier based in Reading, England, sliced the price for his two-bedroom apartment twice to 205,000 pounds ($325,000) from 220,000 pounds. It eventually sold after five months, but not before the 27-year-old had postponed the purchase of a new car and reconsidered a skiing vacation next year.
``If I had sold at the original price I certainly would have changed my car by now,'' Allen said.
In Spain, where the average home cost almost 18 percent more last quarter than a year earlier, price growth may slow to 5 percent next year, according to 10 executives and analysts polled by Bloomberg News.
``Many people have already bought their homes and the slowdown in economic growth is beginning to take its toll,'' Juan Jose Brugera, chief executive of Inmobiliaria Colonial SA, Spain's No. 3 real estate company, said in an October interview.
Less Refinancing
Housing may slow in Asia as well. ``Korea's property market is peaking out. Property prices will be trending down and it will be a drag on economic growth,'' said Andy Xie, chief economist at Morgan Stanley Asia Ltd. He expects Seoul prices to fall about 10 percent next year.
Declining prices are already common in Singapore, which is trying to recover from its worst recession in four decades. In July, marketing executive Cindy Koh sold her 2 1/2-story terrace house in the Serangoon gardens area for S$1.36 million ($778,000) about S$200,000 less than she paid two years earlier.
``A few years ago the property would have cost much more,'' said Koh, 35.
In the U.S., the world's biggest economy, many homeowners refinanced their homes at lower mortgage rates, putting more cash in their pockets. The average rate on 30-year mortgages hit a 12- year low of 5.74 percent last month.
With the possibility of higher rates next year, U.S. home refinancings may shrink by half next year to $751 billion from a projected record of $1.4 trillion this year, the Mortgage Bankers Association estimated.
Broader Impact
Demand for low-rate loans will also slip because ``most people eligible to refinance have already done so,'' Gramley said.
Fewer U.S. consumers treating their homes like a cash machine may have ripple effects in other countries, because Americans may trim purchases of imports along with domestic goods. ``The U.S. is the only game in town for global growth,'' said Allen Sinai, president of the forecasting firm Decision Economics Inc. in New York.
Tim Calland says he won't be doing much to help the economy. He hasn't sold his home in Chapel Hill, North Carolina, after more than four months and an $8,000 price cut to $297,000.
With his $1,050 rent at an apartment near his new job in Connecticut on top of his $2,000 mortgage payment, the electrical engineer has little money left over for such things as the engagement ring he wants to buy for his fiancйe.
``I eat a lot of macaroni and cheese waiting for the damn thing to sell,'' he said.