Nov 25, 2008 3:07 pm US/Pacific
With Credit Tight, Businesses Squeezed
NEW YORK (CBS News) ―
The government reported Tuesday that Americans saw their usable incomes plunge more than 9 percent in the third quarter - the biggest drop on record. That makes credit that much more critical to consumers, and to the businesses they once frequented.
Scott Perlstein says business at his family's car dealership is the worst it's been since opening in 1956, CBS New correspondent Kelly Wallace reports.
He says his customers can't borrow money to buy cars. In the past, buyers could put virtually no money down on a $30,000 car. These days, they have to put at least 25 percent down, or $7,500.
"I think the demand for the vehicle is there, but people have been pushed away due to credit restrictions, and until we feel it, until money hits Main Street, it's not going to change," says Perlstein, general manager of Nemet Auto Group in Queens, N.Y.
It's the same story for real estate agent Janet DePalma, who says her office is unnervingly quiet because of the credit crunch.
"We're about 60 percent down from last year," she said.
The government's massive consumer debt bailout is aimed at getting more people into Perlstein's showroom and DePalma's office - by making car loans, mortgages and credit cards more affordable and accessible.
"Right now, even consumers with very good credit are finding it very difficult to borrow," says Gerri Detweiler, a credit advisor for credit.com. "So the goal is to get some credit moving again, so consumers can do what we do best, which is consume and borrow."
The Fed may have accomplished that almost immediately. Today rates on a 30-year fixed mortgage dropped significantly from 6.125 percent to 5.375 percent. That means on a $200,000 mortgage, you'd pay 100 dollars less a month, saving $1,200 a year.
The Fed hopes by bringing rates down demand will rise and housing prices will stop their precipitous decline. Home prices are down nearly 17 percent since last year.
But there is a big unknown about the government's rescue plan: Will consumers, who pulled back spending this summer by the biggest amount in 28 years, rush out and start buying again?
Consumers are nervous. "We've borrowed ourselves into a corner and a lot of people are waking up and realizing that that isn't sustainable," Detweiler says.
There is an irony here. It was the era of easy, free-flowing credit that drove America into the fiscal ditch. Now the Feds are stepping on the credit gas pedal to try to drive us out.
(© MMIX, CBS Broadcasting Inc. All Rights Reserved.)
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