Consumer spending keeps the bearings of the nation's economic machinery oiled and, this summer, the housing market will keep consumer's palms greased.

Rising interest rates and higher energy prices won't keep consumers out of the malls and big box stores this summer because rising home values are offsetting those expenses and allowing consumers to shop, well, until home values drop -- which isn't likely anytime soon, according to Deloitte Research's Leading Index of Consumer Spending.

Much of consumers' spending will be aimed at finding, filling, fixing and fine tuning homes as they purchase furniture, consumer electronics, appliances and home improvements, according to Deloitte.

"Many consumers postponed buying new homes until interest rates reached the bottom. With interest rates on the rise, they have decided to get off the dime to avoid higher rates," says Carl Steidtmann, Deloitte Research's chief economist and author of the monthly index.

"Baby boomers are purchasing their second homes in retirement and vacation spots, while children of baby boomers are purchasing their first homes at the low-end, creating a chain reaction. Essentially, consumers are trading their current residences for a better home," he added.

That two-pronged buying trend is particularly obvious in the nation's condo market where values are appreciating faster than in the single-family detached home market, according to the National Association of Realtors.

The median existing condo/co-op price during the first quarter was 14.5 percent higher than the same quarter in 2003. The median price of an existing single-family home rose only 6.5 percent during the same period, NAR reported.

About half of all condos are purchased by first-time buyers, with empty-nesters and older homeowners buying 42 percent of condos, often upper-end units to accommodate lifestyle changes.

"Condos are proving to be a good investment choice for both ends of the housing market, with double-digit appreciation during each of the last three years," said NAR president Walt McDonald, broker-owner of Walt McDonald Real Estate in Riverside, CA.

Appreciation helps pad the pockets of homeowners willing to spend it, and even in the land of the "frugal Yankee," the Deloitte report rings true.

"I am having more success with homes that actually need work, as buyers are less afraid to tackle changes and upgrades," said Dane Hahn, broker/owner of Exit 11 Real Estate in Stratham, NH.

Nationwide, 52 percent of recent home buyers complete one or more home improvements within the first year of purchase. Half of them also plan at least one more project within the next year. The work costs an average $3,100 in the first year, $2,000 is spent on home improvements for older homes and $5,000, on the average, is spent to upgrade newer homes, according to a recent study commissioned by Reed Exhibitions and conducted by the not-for-profit Home Improvement Research Institute (HIRI).

"That's a big change from the last 5 years when homes needed to be perfect to sell. Our median sale price is now over $400,000, up from $385,000 this time last year. And this is New Hampshire, home of the frugal Yankee," said Hahn.

On the other coast, buyers are picking up fixer-uppers as a way to get into the more expensive market, a strategy that also generates more housing-related spending.

"I'm not seeing clients who say they have money-to-burn after purchasing a home. Most of my buyers are first timers who have stretched to get in. In the competitive market we currently have, many of them are purchasing homes that need work. If anything, their remaining funds are going to deferred maintenance rather than for improvements," said Janet Houde, an independent real estate agent in San Jose, CA and president of the Santa Clara County Association of Realtors.

Deloitte says a number of factors are behind consumers spending like it's 1999:

• Real home prices are significantly higher than they were last year, up an average of nearly eight percent nationwide last year, according to the Office of Federal Housing Enterprise Oversight (OFHEO). The equity growth, along with lower interest rates, has generated a large pool of cash for use in construction, remodeling and other housing-related expenses. In Silicon Valley, CA a nearly $60,000 one-month price jump translated into a windfall equity boom.

• The job market is improving. Initial unemployment claims are down 20 percent from a year ago and employment rose by more than 513,000 in the first quarter of 2004 -- the largest quarterly gain increase since the first quarter of 2000.

• Tax payers are getting larger refunds this year, an average $2,063, compared to $1,965 in 2003, according to the IRS.

• Real wage gains in 2003 may flatten this year due to inflation.

The Deloitte index is comprised of four components -- tax burden, initial unemployment claims, real wages and real home prices. It rose to an all time high of 5.46 percent in March, up from an upwardly revised gain of 5.11 percent the previous month.

"We have reached an inflection point in the economy," says Steidtmann. "While in the past, growth was fueled by low interest rates and tax cuts, we are now seeing growth stem from rising housing values and job creation."

In high-end real estate markets, consumer spending is coming from both home buyers who are tapped out after they purchase and homeowners who are fixing up instead of moving up.

"The home buyers have no cash after jumping in. They are getting zero down loans and are tapping their savings for closing costs. They are 80 percent first-time buyers in my market. The ones who might have moved up, instead of using their equity to buy bigger and better, are tapping their equity and spending. It's like found money to them," said Michael D. Donohoe, broker-owner of Silver Creek Financial in San Jose, CA.

Even cash-strapped home buyers are finding ways to spend on basic upgrades.

"A lot of my clients are first-time buyers who are barely able to squeak into a home. However, they do seem to find the money to replace old appliances, so I definitely believe the economy will get a boost from that type of purchase," said Linda C. Boyd a broker associate with John V. Pinto & Associates, Inc. in San Jose.

Published: May 13, 2004

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.