April 27 (Bloomberg) -- Carol Francis says her customers are less likely to make big furniture purchases these days than they were at the height of the housing boom two years ago.

``The housing market right now is affecting everybody's spending,'' said Francis, a design consultant at Thomasville Home Furnishings in Woodbridge, Virginia, 25 miles south of Washington. Before, ``I had people who would buy two and three bedrooms of furniture. Now many come in and just buy one piece at a time.''

With home prices in danger of falling this year for the first time in at least four decades, Americans are turning wary about borrowing against their houses to pay for vacations, education or remodeling projects. In a reversal of the ``wealth effect,'' people who once viewed soaring home values as a rationalization for higher spending appear to be pulling back.

``We're in a housing recession; it's not over and it's going to spread to other parts of the economy, mainly consumer spending,'' said Paul Kasriel, director of economic research at Northern Trust Securities in Chicago. ``House prices are going to continue to fall, and that's going to play havoc with consumers because it means the home ATM is now draining, it's no longer filling.''

The housing slump helped hold U.S. gross domestic product growth to a 1.3 percent annual pace in the first quarter, the slowest in four years, the Commerce Department reported today.

Consumer Pessimism

Consumers turned more pessimistic this month, a private report showed, as concerns about sinking home values intensified. The Reuters/University of Michigan index of consumer sentiment dropped to a seven-month low in April.

While home sales and construction have been falling for more than a year, the secondary impact on consumer spending, which accounts for 70 percent of the economy, may just be kicking in.

Kevin Logan, senior market economist at Dresdner Kleinwort in New York, says the reverse wealth effect will subtract about 0.7 percentage point from consumer-spending growth this year. He expects spending in the fourth quarter to be 2.7 percent higher than a year earlier, compared with growth of 3.6 percent in the fourth quarter of 2006.

Staying Power

Some economists say the consumer still has staying power.

``People have been a little too quick in looking for the consumer to cash it in,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Inc. in New York. ``Housing wealth looks like it's flattening, not collapsing.''

A rising stock market may also dissipate some of the consumer gloom over lower housing prices, said Joel Prakken, chairman of Macroeconomic Advisers in St. Louis, Missouri.

The first quarter may have been the consumer's last fling. Today's report on gross domestic product showed that personal consumption grew at a 3.8 percent annual rate in January through March. Spending growth is projected to slow to an average 2.5 percent annual pace in the last three quarters of 2007, according to the median estimate of economists surveyed this month.

Francis, 44, said the housing slump has prompted her to change her own home-remodeling plans. ``It does affect me,'' she said. ``I've slowed the renovation work.''

No Meat

She says furniture sales have been weakening for more than a year. ``A lot of people bought houses at a time when they were making $200,000, $300,000'' on the sale of their previous homes, Francis said. Now, they have ``these big, beautiful homes, but there is no meat in the freezer.''

Some homeowners are strapped as their mortgage payments increase after low ``teaser'' rates expire.

John Silva, a software salesman in Raleigh, North Carolina, makes about $45,000 a year and has struggled since his monthly mortgage payment adjusted to $1,205 from $945.

``I have a 20-year marriage anniversary coming up, but it won't be what I had wanted it to be,'' he said. ``We can't even afford going to fast-food restaurants, never mind a nice restaurant.''

Median existing-home prices will drop 0.7 percent this year from 2006, the first decline since recordkeeping began in 1968, according to the National Association of Realtors. Prices in March were below year-earlier levels for the eighth consecutive month.

``Without home prices rising any more, people will become more cautious in their spending,'' said Raymond Stone, managing director at Stone & McCarthy Research in Skillman, New Jersey.

Home Equity

Borrowing against home equity financed 2.1 percent of consumer spending in 2005, up from a 0.6 percent average between 1991 and 2000, former Federal Reserve Chairman Alan Greenspan said in research published this week.

In the last three months of 2006, homeowners took cash out of their houses through borrowing or profit from sales at an annual rate of $386.1 billion, less than half the $801.6 billion rate in the fourth quarter of 2005, according to research compiled by Greenspan and economist James Kennedy.

At Holly Acres, a boat dealership in Prince William County, Virginia, general manager Debbie D'Amico says sales are slowing: ``People are a little bit scared. In this county, home assessments dropped 4.6 percent where every year they've been steadily rising.''

Home prices may fall further as foreclosures in the subprime-lending market add to the supply of unsold homes.

``If subprimes get worse then it'll pull down home prices more, and we'll have a bigger adverse wealth effect,'' said Dresdner Kleinwort's Logan.

With reporting by Bob Ivry and Stefan Whitney in New York. Editor: Rohner (mpg/mfr)

To contact the reporter on this story: Bob Willis in Washington bwillis@bloomberg.net.

Last Updated: April 27, 2007 12:19 EDT