Low interest rates don’t tempt spenders

There are already signs the recent stock market upheaval, turbulence in Europe, and gridlock in Washington over the federal deficit have spooked consumers. On Friday, preliminary data showed the Thomson Reuters/University of Michigan consumer sentiment index had fallen this month to lower than it was in November 2008, when the country was deep in recession.

Under normal circumstances, the Fed’s announcement might have attracted new home and car buyers and prompted credit card holders to rack up fresh charges. But with unemployment high and those with jobs worried about keeping them, consumers are more concerned about paying off the loans. And by showing its hand for the next two years, the Fed may have inadvertently invited prospective borrowers to put off large purchases.

In housing, consumers have already shown a lackluster response to low rates. Applications for new mortgages have slowed this year to a 10-year low, according to the Mortgage Bankers Association. Sales of furniture and furnishings remain 22 percent below their prerecession peak, according to MasterCard Advisors SpendingPulse, a research service.

One of the biggest restraints on consumer spending has been a debt hangover. Since August 2008, when household debt peaked at $12.41 trillion, it has declined by about $1.2 trillion, according to Moody’s Analytics. A large portion of that, though, was simply written off by lenders as borrowers defaulted.

By other measures, households have improved their position. The proportion of after-tax income that households spend to remain current on loan payments has fallen, from close to 14 percent in early 2007 to 11.5 percent, according to Moody’s Analytics.

Still, household debt remains historically high. That presents a conundrum: Many economists argue the economy cannot achieve true health until debt levels decline. But credit, made attractive by low rates, is a time-tested way to kick-start consumer spending.

Mortgage lenders, meanwhile, burned by the housing crash, are extra careful. In June, for instance, Fannie Mae, the largest mortgage buyer, said borrowers whose debt exceeded 45 to 50 percent of income would be required to have stronger “compensating’’ factors, which might include higher savings.

Even borrowers in strong positions are asked to provide unprecedented amounts of paperwork. Bobby and Katie Smith have stellar credit, tiny student debt, and a combined six-figure income. For part of their down payment, they planned to use about $5,000 they had received as wedding gifts. The lender would not accept that money unless the Smiths provided a certified letter from each of 14 guests, stating the money was a gift, rather than a loan. “We laughed for a good 15 or 20 minutes,’’ Bobby Smith said. They used other savings for a down payment on a Florida home.

For those not as creditworthy as the Smiths, low rates are irrelevant because they no longer qualify for mortgages. That leaves the eligible pool of applicants wealthier, “older and whiter,’’ said Guy D. Cecala, publisher of Inside Mortgage Finance. “It’s creating much more of a divide between the haves and the have-nots.’’

Car shoppers with the highest credit ratings can also get loans more easily and at lower rates, said Paul C. Taylor, chief economist of the National Automobile Dealers Association.

During the recession, inability to obtain credit severely curtailed auto buying as lenders rejected even those with good credit. Now automakers are increasing their subprime lending again, but remain hesitant to approve large numbers of risky customers.

The number of new auto loans was up 16 percent in the second quarter, compared with a year earlier, said Melinda Zabritski, at Experian.

But according to CNW Marketing Research, confidence among those who intend to buy a car this year is at its lowest since it began collecting data on this measure in 2000.