Foreclosures lift consumer spending: JPMorgan

NEW YORK Wed Jun 11, 2008 2:34pm EDT

Tom Lee, Chief US Equity Strategist for JPMorgan, speaks at the Reuters Investment Outlook Summit in New York, June 11, 2008. REUTERS/Brendan McDermid

Tom Lee, Chief US Equity Strategist for JPMorgan, speaks at the Reuters Investment Outlook Summit in New York, June 11, 2008.

Credit: Reuters/Brendan McDermid

NEW YORK (Reuters) - The record wave of foreclosures darkening the U.S. housing market may actually be boosting consumer spending, Tom Lee, chief U.S. equity strategist at JPMorgan Securities, said on Wednesday.

Many owners are stuck with mortgages that exceed the value of their homes after a double-digit national home price slump in the last two years. Conventional wisdom says owners who are unable to refinance or sell their homes are cash-starved and sharply curbing spending.

But Lee said that as an increasing number of "under water" homeowners return their keys to lenders and walk away from their mortgages and properties the reverse is true.

"In a perverse way, people who are leaving homes are actually helping the consumer spending picture," Lee told the Reuters Investment Outlook Summit on New York.

"If you were under water in a mortgage, and then you walked away, you literally stop paying the mortgage so your actual disposable income goes up," he said.

This may be one reason why consumer spending hasn't gotten hit harder given the headwinds of the worst U.S. housing market since the Great Depression and sweeping oil price gains, according to Lee.

Sales at U.S. stores open at least one year, a retail benchmark known as same-store sales, rose 2.5 percent in May, more than twice the average increase forecast by economists, for example, as consumers focused on discount prices and essentials.

"While they don't have the consumption upside from wealth and therefore the propensity to spend" from money gained from home price appreciation, "if they walk away from their home, they actually can increase spending power," Lee said.

(Reporting by Lynn Adler; Editing by Leslie Adler)