Consumers Act Cautiously at Windfall News


At Ma-Ka Sales, a syrup maker in Gardena, the lower interest rates announced Friday may lead to new investment in bottle-filling machines and new orders for sugar and other supplies. But when it comes to his personal finances, company president Richard Kane Jr. is hedging his bets: If his home equity loan payments go down, he will hang onto the extra cash rather than spend it in today’s unstable economy.

“You don’t know what’s going to happen,” he explained.

The startling drop in interest rates, engineered by a deeply worried Federal Reserve, will ripple beneficially throughout the nation, saving billions of dollars for people and companies weighed down by debt.

Many holders of home equity loans, adjustable-rate mortgages and a range of business loans stand to gain. In addition, lower rates will mean direct cash savings for people who buy homes, autos and other big-ticket items with bank loans in the coming months.


Yet Kane’s uncertainty about the future is shared by professional analysts, who note that today’s economy poses a bewildering puzzle. A barrage of layoff announcements has rattled consumer confidence, despite numerous cuts in interest rates since the country sank into recession in July, 1990.

Moreover, the retrenchment affecting the retail, financial services and other industries is not likely to stop because of interest rate cuts.

In Orange County, for instance, where real estate is one of the biggest engines driving the local economy, experts said the drop in interest rates is likely to do little more for now than induce more people to refinance their homes at lower rates.

It’s not likely, for example, to have much of an impact on the moribund commercial real estate market; the problem in that industry is not interest rates but a lack of money available for real estate development.


“It doesn’t matter what the interest rate is,” said Bryan Frazier, a vice president at the Alison Co., a mortgage banker in Newport Beach. “The problem is that lenders are still reluctant to put their money into commercial real estate. And this isn’t going to encourage them to free up additional dollars.”

So many lenders have been burned on bad real estate loans, and government scrutiny of real estate lending is so intense that there is little money for developers to borrow at any interest rate, Frazier explained.

Even though the Federal Reserve has dropped the discount rate several times already this year, “it hasn’t made a dent in the outlook for commercial real estate lending,” said Michael L. Meyer, managing partner of real estate accountants Kenneth Leventhal & Co.'s Newport Beach office.

“As long as there’s a credit crunch and consumers aren’t spending and business isn’t expanding, there’s not going to be any increase in the demand for commercial space,” he said.


As for home-mortgage lenders, they’ve seen a little surge in home-buying in the last few months and still lower interest rates certainly won’t hurt. But in some cases--such as that of mortgage banker RNG Mortgage in Santa Ana--more of the business these days is in refinancing than in new home loans. In more normal times, those proportions are reversed, said branch manager Alan Attardo.

“What these lower rates are going to do is really affect the refinancing market,” he said. “And that means the people who are really dying are the realtors. At least we have the option of picking up the phone and calling 100 people to ask them if they want to refinance.

“And that’s the product we’re out trying to hustle these days.”

Over at Fullerton Savings & Loan Assn., a small, seven-branch thrift, President Carl Gregory is saying the same thing.


“Obviously, lower interest rates will create a bigger pool of people who are able to buy a home,” he said. “But the psychology out there is still quite negative concerning large purchases. So this won’t have much effect on home sales.

In fact, it’s a “50-50 tossup” whether the latest Fed move will succeed in jump-starting the economy, said John O. Wilson, chief economist at Bank of America in San Francisco. “We’ve never been through a period like this.”

In light of such questions, many economists prescribe new policy initiatives outside of the Fed, such as tax incentives that would spark new investment in industry, as a way to further bolster the sagging economy.

“Whether this is sufficient, only time will tell,” said Robert H. Dugger, chief economist at the American Bankers Assn. in Washington. “We’re in economically uncharted waters.”


Among consumers, the attitude toward lower rates was mixed Friday, with many girding for the possibility that times will get tougher.

Dean Hobbs, a 47-year-old jewelry salesman at the Broadway department store at 7th and Flower, said that news of the low interest rates “doesn’t mean a whole lot to me.”

“I’m holding on to every dime I have,” he said. “People are getting laid off--just look at what happened at GM,” where 74,000 jobs will be eliminated in coming years.

“I’m about as confident in my job as any other job,” Hobbs said. “The thing is, no one knows how bad things are going to get and I think things will get worse before they get better.”


Tim Millett, walking through the Broadway Plaza Friday afternoon, said he wished he “had enough money to take advantage of the low interest rates. I’d love to purchase a home. It’s an ideal time for people to purchase houses and if I had more money I would.”

Millett, 30, a Los Angeles attorney, said that he wished he had waited a week before he bought a 1991 Acura Integra. “I wish I had known the rates would continue to drop. I would have waited to buy the car, but the rates a week ago were still fairly low, anyway.”

Some car dealers in Orange County, in fact, say the new rates could boost auto sales--not immediately, but by the end of 1992’s first quarter. They do expect, though, an immediate impact on their cost of operations.

“This will translate to a whole percentage-point drop in interest we pay to our foreign sources, so our operating cost will drop substantially,” said Robert Tuttle, president of the Tuttle-Click Automotive Group in Irvine, which operates four foreign and domestic car dealerships in Orange County.


But any increase in auto sales will require a change in consumers’ current pessimistic psychology, says Kevin L. Allen, executive director of the Orange County Motor Car Dealers Assn.

“If consumers are doubtful of their employment future--considering the reduction of jobs due to restructuring of industries--then they’re going to hold off on purchases of big-ticket items like cars,” he said.

By all accounts, however, if the lower rates are to have a major effect, it must happen in the beleaguered real estate and banking industries.

One encouraging sign for the industry: 30-year fixed-rate mortgages could drop to 8% by mid-January from about 8.5% currently, experts said, and the average adjustable-rate mortgages could start initially at levels below 5%.


While lower rates are likely to spur demand for housing, no one knows just how dramatic the upturn will be.

“This is the big test we’ve all been waiting for,” said David F. Seiders, chief economist for the National Assn. of Home Builders. “The housing sector is still the most interest-sensitive sector of the economy. If the demand for single-family homes picks up, the whole economy could come together.”

In any case, a large number of Americans stand to reap small windfalls as their adjustable loans are recalculated in the coming months. As banks learned of the Fed’s move to reduce the discount rate to 3.5%--an extraordinary one-point drop--they began reducing their prime lending rates--a benchmark for many other loans.

“Immediately, tens of thousands of small businesses will see a reduction in their financing costs,” declared Dugger of the American Bankers Assn. “Tens of thousands of households with home equity loans and adjustable-rate mortgages will see reductions in their expense.”


On a typical $50,000 loan, a one-point interest-rate drop, for example, can mean savings of $42 a month.

Private businesses stand to benefit also. Barney, Ungermann & Associates, a court-reporting firm in Pasadena, has a floating-rate loan, pegged to the prime rate, which is likely to drop considerably in the wake of the Fed’s easing.

“The lower it goes, the easier it is for us to accommodate things like advertising to build name recognition, investing in new technologies, that sort of thing,” said Charles M. Ungermann, general manager of the firm.

Ultimately, lower-interest rates could be a blessing for the economy. “We’re going to go into the rest of the 1990s with much-reduced interest rates, which are setting the stage for aggressive business investment and housing recovery,” said the Bank of America’s Wilson, cautioning that such good news may not be obvious in the “short term.”


Yet lower interest rates also have a down side. A growing portion of the public now relies on interest income, and such individuals, including many retirees, may lose hundreds or thousands of dollars as rates continue to plunge.

“When consumers’ income falls, so does their spending,” warns Carl Steidtmann, chief economist at Management Horizons in Columbus, Ohio. “In the short term this could be a negative move for retailers.”

More broadly, economists wonder whether the tool of lower interest rates is capable of fixing the stalled U.S. economy in a time when consumer fears are rampant, due to a widespread restructuring of industry that has led to highly publicized layoffs.

To reinforce the effect of lower rates, many experts call for a “fiscal” policy fix, including such measures as a tax credit to promote investment, new tax incentives to promote saving or some form of tax break on capital gains that would be designed to reward investment in industry.


Interest-rate policy “cannot be the only tool to get us out of this situation,” said Joel L. Naroff, chief economist at First Fidelity Bancorp in Philadelphia. “It’s going to require some help” from other policy initiatives.

Though cheered by the drop in the discount rate, retailers doubted whether it would have an immediate positive impact on their lackluster business--or spark the leap in consumer confidence that retailers are awaiting so eagerly.

“This will help, but it won’t do enough to spur consumer confidence,” said Richard Giss, a retailing expert with the accounting firm of Deloitte & Touche in Los Angeles. “What happened at General Motors this week, and the fear for job safety that it provoked among Americans, will more than offset any good coming from a cut in the discount rate.”

However, for some deeply indebted retailers, such as R.H. Macy & Co., whose borrowings exceed $3 billion, the discount rate decline could translate into lowered interest rates on loans that are pegged to the current market conditions.


Times staff writers Carla Lazzareschi, Jube Shiver Jr. and Kevin E. Cullinane in Los Angeles and Michael Flagg and Cristina Lee in Orange County contributed to this story.