Equity loan: Effect on the retail market

American economy supports more than 1.1 million retail stores. It is anticipated that more than 150,000 stores would shut down in 2009. This would lead to 700,000 retail jobs that would become non existent throwing the workers on to the street. In normal cases almost 110,000 to 125,000 malls open every year, but 2009 will see no new openings. Many big retailers like Circuit City, Pacific Sunwear, Foot Locker, Linens N Things etc have closed many of their stores. The vacant stores that are being created would make sure that there is no need for new constructions and new locations for many years to come. Thus commercial real estate collapse is more rapid when compared to residential collapse. The loans and properties here are larger and hence the stakes are bigger.

This is the commercial situation brought about by average Americans who lived life beyond their means on the basis of wealth on paper and credit. As their home values increased they took advantage and refinanced their mortgages extracting home equity and spent it. They have sucked out $3 trillion of equity from their homes in the way of equity loans. Credit cards were issued by banks against home equity. Lots of equity loans and withdrawals led to a huge demand for increased exotic vacations, home furnishings, electronic gadgets and appliances, BMWs and such high end expenses.

Now it is a different scene altogether. The American consumer has lost $30 trillion from their equity loans. The recklessness of the consumer has created this peak credit situation where the only way out is destruction. Banks and consumers have been hurt and there has been a psychological change. This credit expansion has been going on for the past 20 years and we are witnessing the end of it. To get the economy back on track it is necessary for debts to be written off. The consumer can learn to live within means and reduce spending and borrowing spree.

There are billions of loans that would be better off with refinancing but there are no takers for these loans. The mall developers are a worried lot. Retailers are becoming bankrupt, increasing unemployment and practically no rental income. It is time for the US tax payers to take responsibility. Americans have reduced their spending considerably. They are learning to survive without Starbucks latte, IKEA knickknacks, Rolex watches, granite counters and stainless steel appliances. This lack of spending is leading to the end of a mall centric world. Low prices are the only option that drives sales and this in turn leads to expansion and renovation restrictions. Most of these retailers are neck deep in debt and worked under the assumption that Americans love to spend relentlessly. This error in assumption has led to many bankruptcies.

This error has affected all retailers who financed their expansions with loans.