U.S. subprime squeeze could dent comsumer spending
By Heather Burke Bloomberg News
Published: March 30, 2007

NEW YORK: Al Ynigues bought his house in 2004. Since October, his monthly mortgage payment has climbed 16 percent, to $2,417. It will rise again April 1.

Ynigues, 65, makes $2,800 a month as a self-employed music teacher. He says he eats once a day, has stopped paying his utility bills and is late on payments for his home in Apple Valley, Minnesota, 20 miles, or 32 kilometers, south of St. Paul.

"My mortgage has changed everything," Ynigues said. "It's really demoralizing."

Ynigues is one of about 800,000 U.S. homeowners who took out so-called subprime mortgages and now are struggling to make monthly payments. As these consumers spend less on products including home furnishings and clothing, sales at retailers like Home Depot and Wal-Mart Stores may suffer.

"There'll be more of a focus on necessities like food," said Howard Davidowitz, chairman of New York-based retail consulting firm Davidowitz & Associates. "People are going to be squeezed."
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Delinquencies among subprime borrowers, who tend to have tarnished or limited credit histories, hit a four-year high in the fourth quarter, the Mortgage Bankers Association said this month. Foreclosures on all types of home loans rose to a record.

Home-improvement stores and retailers selling to people in the subprime borrowers' income bracket may feel the biggest pinch. "If you are a subprime borrower and your home is repossessed as thousands have been, you aren't going to be buying at Home Depot," Davidowitz said.

A Home Depot spokesman, Jerry Shields, said the company would not comment on specific housing industry trends.

Home Depot, which is based in Atlanta and is the world's largest home- improvement retailer, said last month that for this year it expected its first annual decline in profit since at least 1990, citing the housing market. The company said profit would decrease this year to as little as $2.55 a share from $2.79 last year.

Home Depot shares have fallen 8.4 percent this year, compared with a 1.3 percent rise by the Standard & Poor's 500 Retailing Index.

Wal-Mart, the world's biggest retailer, may lose sales of products including clothes and DVDs, said Patricia Edwards, a money manager with Wentworth Hauser & Violich, which is based in Seattle.

A Wal-Mart spokesman, John Simley, declined to comment. The company, based in Bentonville, Arkansas, will report March sales on April 12. In 2006, Wal-Mart had the smallest same-store sales gain in at least 27 years. Its shares have increased just 1 percent this year.

U.S. retail sales growth may slow in 2007 to 4.8 percent, the smallest gain in four years, the National Retail Federation, which is based in Washington, said in January.

Defaults on subprime loans have climbed recently. Lenders had issued mortgages to people with poor credit, often with so-called teaser deals including small or no down payments and low but adjustable interest rates.

Those borrowers may face an average monthly increase of $400 as the adjustable mortgages reset at higher rates in the next two or three years, said Christopher Cagan, research director at First American CoreLogic, a mortgage-risk data provider.

As many as 2.4 million Americans may lose their homes because of the collapse of subprime lenders and foreclosures, Mike Calhoun, president of the nonprofit group Center for Responsible Lending testified to Congress this week.

Subprime borrowers' woes also may curb business at casual-dining restaurants that rely on low-income consumers, according to a report issued last week by J.P. Morgan Chase. The report singled out Applebee International, which has more low-income consumers than its competitors.

Same-store sales at Applebee's, a chain with more than 1,940 restaurants, declined in 10 of 12 months through February. Applebee's spokeswomen, Carol DiRaimo and Laurie Ellison, did not return messages seeking comment.

"You see a clear trend of people trading down," the chief executive of CKE Restaurants, Andrew Puzder, said last week. CKE operates Carl's Jr. and Hardee's fast-food chains.

Spending may also be curbed at Dollar General, Family Dollar Stores and Dollar Tree Stores because of higher subprime payments, J.P. Morgan said.

"It's difficult to determine any impact," said a Family Dollar spokeswoman, Kiley Rawlins.

Leisure industries also may be hurt by the credit squeeze. Carnival reduced prices on Caribbean trips this month after U.S. consumers cut back on vacation spending.