ATLANTA (Reuters) - After years of living large, U.S. households are finally learning what financial experts thought they never would: to live within their means.
Economists have long warned that the U.S. consumer was on an unsustainable spending frenzy and that savings rates were dangerously low. Now, families are being forced into financial responsibility by the housing downturn and a weakening economy.
"For many years people on Wall Street have refused to believe that American consumers could ever change their spending habits," said David Rosenberg, North American economist at Merrill Lynch. "But it's happening."
"Frugality is in, extravagance is out," he added.
Consumer spending accounts for 70 percent of the U.S. economy and, according to Rosenberg, 30 percent of that is discretionary spending -- that is, buying stuff you can live without.
Theresa Parks is a case in point. Parks, 36, paints lines on roads and highways for the city of Atlanta for a living. She bought a home in 2006 for herself and her three daughters in the suburb of Riverdale, but fell behind with her $669 monthly payment.
Her lender agreed last September to a repayment plan that required an additional $188 a month through to June 2008.
"We had to cut eating out at restaurants and we had to stop shopping," Parks said. "That was the hardest part for my teenage daughters because they love to shop. But I sat them down and we agreed we'd do anything to keep our home."
Regina Grant of the Atlanta Cooperative Development Corp helped Parks rework her budget and said most of her clients require help managing their spending.
"None of them have ever prepared a budget, but they have to now if they want to keep their homes," she said.
Just a few miles away, Ozell Brooklin, director of nonprofit Acorn Housing tells a room of some 15 struggling borrowers that if they want their banks to lower their interest rates or even forgive some of their debt, they must prioritize spending.
"Your first priority will be your mortgage, then food, then utility bills then one family car if you need it for work," he said, standing at a lectern and counting off those priorities on his fingers. "Everywhere else we're going to cut spending because your lender won't make a deal with you if they think you have money to spare for luxury items."
Some 700 miles further north, in Cleveland, Ohio, Mark Seifert of nonprofit East Side Organizing Project says counseling stricken borrowers means telling them harsh truths.
"We get home owners coming to us in trouble, but then we look and see they have only make $50,000 a year and yet they own an Escalade," he said, referring to a Cadillac sport utility vehicle that sells for about $55,000. "And you have to ask them 'What on earth were you thinking?"'
As the U.S. housing crisis deepens, many more Americans will be forced to budget to avoid foreclosure, with serious implications for an economy teetering on the brink of recession.
"This is going to take a bite out of consumer spending and is an ominous sign for the economy," said University of Maryland business professor Peter Morici. "We are in a recession that was manufactured on Wall Street by the major banks."
One of the hallmarks of the recent property boom was that buyers could get into a home with little or no money down. Those days are apparently over.
"What we're seeing a lot of is people with good income who haven't put any money aside and now have to save for a deposit on a home," said Van Johnson, president of the Georgia Association of Realtors. "When people like that don't spend, restaurants and retailers suffer and it tends to slow the economy down."
"There will be pain in that correction," he added.
Terry Kibbe of Washington, DC-based nonprofit group the Consumer Rights League -- which is campaigning against any form of government "bailout" for banks or borrowers -- said that higher down payment requirements are a natural consequence of the excesses of the boom years.
"The real estate boom was not going to last forever and it is becoming more difficult to buy a home," she said. "But the market will correct itself and this is part of that process."
There are already signs that American consumers are "trading down" in the search for bargains, with February same-store retail sales showing customers favoring discounters like Wal-Mart Stores Inc over higher-end retailers.
Merrill Lynch's Rosenberg said that in the fourth quarter of 2007, Americans' household debt almost equaled 140 percent of their after-tax income and that they were spending 14.3 percent of their after-tax income paying down that debt.
"Simply put, that means Americans are spending more on servicing their debt than they do on food," Rosenberg said. "This is not just affecting stressed-out or soon-to-be-foreclosed home owners. This hurts everybody."
Rosenberg predicted Americans will start saving more, which he said will shave 1 percentage point off annual U.S. consumer spending growth for years to come.
"It is hard to say how bad things will get," Rosenberg added. "We're in unchartered territory at this point."
As for Theresa Parks of Atlanta, she says that her days of loose spending are over.
"When I catch up with my mortgage, I aim to save every penny I can and plan for my daughters' future."
Reporting by Nick Carey; Editing by Eddie Evans