Retailers are jousting to be the places consumers spend their tax rebates. Sears and Kroger, for example, are offering 10% bonuses to those who convert their entire rebate check into a store gift card. Wal-Mart, CVS Caremark, and others are advertising specials timed to coincide with the rebates showing up in mailboxes. Will they be successful?

A recent Reuters/University of Michigan survey says that 70% of consumers want to use their rebates to bolster their personal balance sheet, by paying down debt or putting the money in a savings account. The remaining 30% intend to spend their windfall. Our guess: Old habits are hard to kill. It’s just like the voter who claims he’ll vote one way and once inside the booth votes another.

In 2001, a survey of consumer intentions that coincided with the mailing of rebate checks indicated that only 22% of the presumed recipients intended to spend their windfall. It didn’t turn out that way. By contrast, the checks led to an 11.5% jump in third-quarter real disposable personal income and a consequent 7% pop in real consumer spending in the final quarter of the year.

Economic consultancy International Strategy & Investment Group is estimating that rebates totaling $116.7 billion will be paid out in coming months. By the end of this month, about $50 billion will have reached taxpayers, with another $50 billion destined to arrive by the end of June. They say that, historically, 65% of the monies distributed have been spent — 25% in the quarter received and 40% in the following quarter.

Putting the figures together, ISI estimates that the impact of the tax rebates will be to boost second-quarter real disposable personal income by 16%. The bad news? That measure is forecast to drop by 11% in the third quarter. Likewise, real consumer spending is projected to rise 4% in the second quarter and 5.1% in the third quarter, but to drop nearly 5% in the fourth period. In other words, the fix is temporary.

Their thinking is that the impact of the rebates will be similar to past experiences. The 1975 rebates lifted real disposable personal income by almost 20% in the second quarter of that year, leading to real GDP growth of 3% in the second quarter and nearly 7% in the third quarter. By the fourth quarter, growth had moderated, though it was still up more than 5%.

The bottom line is that people spend their rebates, but the impact is short-lived. What would give the stimulus a more long-lasting impact? At the end of the day, consumers have to have confidence that their income will increase or that their balance sheet is likely to improve. Since declining home prices and sales have been responsible for so much negative sentiment of late, I think we have to see some stability return to the real estate scene before consumers will cheer up. The outlook here is mixed.

ISI says prices of existing homes will likely continue to drop for the next two years. Vacancy rates are higher than at any time since the 1950s. Sales of new and existing homes continued to drop in March.

The good news is that inventories have been dropping as well. The ongoing falloff in sales has led the figures for months’ supplies still higher (11 months’ supply on the market in March versus 10.2 months in February), but in aggregate, the number of houses for sale dropped in March. Specifically, there were 468,000 new homes for sale in March, down from a peak of 548,000 a year earlier. For existing homes, the comparable figures are 4.1 million homes for sale in March, down from a high of 4.6 million homes last July.

An economist with the National Association of Homebuilders, Bernard Markstein, said the demand for housing today is commensurate with housing starts of between 1.8 million and 1.85 million units a year. His organization estimates that there will be only 926,000 units built in America this year, down from 1.3 million last year. In 2004 and 2005, 1.9 million and 2.1 million units, respectively, were constructed, exceeding demand and leading to today’s surplus. However, in Mr. Markstein’s estimation, the sharp falloff in new construction should lead the industry higher by midyear.

An economist with the National Association of Realtors, Paul Bishop, also suggests that we are nearing a bottom of the housing cycle. He reports that inventories of existing homes are currently at 9.9 months’ supply, down from a peak of 10.5 months last October. He is forecasting that sales this year will be slightly more than 5.3 million, down from 5.6 million in 2007. In 2009, his organization is looking for sales to increase to 5.7 million units. In this context, he projects that prices will on average decline 1.4% in 2008 from the level in 2007, but that by the end of the year prices will be trending higher, and that in 2009 the average home price will be up nearly 4%. Both analysts welcome the housing support bills currently before Congress. Mr. Bishop says that “anything that provides an incentive will help at the margin. Consumers need to see that the worst is over.” What the scary news accounts fail to mention, he points out, is that during this entire period of contraction, there were more households being formed. “There is more and more pent-up demand,” he says.

It seems likely that if housing does indeed bottom this summer, and prices stop declining, consumer sentiment will begin to revive. Other factors that could give consumers a lift are the growing consensus that recession fears have been exaggerated, and a possible recovery in the dollar. As the dollar has sunk, not only has it taken a toll on morale, but it has increased prices for imported goods. A steady continued recovery in the dollar would also constrain oil prices.

That is the bull case, and it does not seem unreasonable. The missing ingredient is where the consumer will get the funds to continue spending. Even in the most optimistic scenario, a resumption of job growth is likely to be sluggish, and income gains equally modest. Most worrisome is that the opportunity to access funds from mortgage equity withdrawals, a huge source of spending in recent years, has dropped precipitously. Thus, while it is easy to see how spending might recover at the margin, it is also prudent to view any upturn as likely to be unexciting. On the other hand, given the turmoil of the past year, maybe unexciting isn’t so bad.

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