Mortgage Equity Withdrawal Only Modest Drag on Consumer Spending

Excerpt from Raymond James Economist Dr Scott Brown's latest economic commentary:

The extraction of home equity wealth has been an important factor supporting consumer spending growth in the last few years. Jim Kennedy has provided me with updated data for the mortgage system presented in a paper he coauthored with former Fed chairman Greenspan ("Estimates of Home Mortgage Originations, Repayments, and Debt On One-to-Four-Family Residences," Alan Greenspan and James Kennedy, Federal Reserve Board FEDS working paper no. 2005-41). The updated figures, based on the Fed’s Flow of Funds figures, show that mortgage equity withdrawal was higher in recent quarters than was previously estimated. The pace of mortgage equity withdrawal has slowed, but remains high by historical standards (equivalent to 4.9% of disposable income in 2Q07).

Will mortgage equity withdrawal fall back to previous levels? Not anytime soon. While home price declines have become more noticeable, particularly for areas that had experienced more rapid home price increases during the housing boom, those homeowners who have been in their homes for three or more years are still sitting on a sizeable capital appreciation. The pace of mortgage equity withdrawal is likely to cool, but not fall off a cliff – resulting in a moderate drag on consumer spending growth over the next few quarters.

Comments

[Uncle Bill:]

States a conclusion, but offers no evidence. You're wrong, Doc. As soon as home prices start falling -- there's a serious gap between bids and offers right now, hence nothing is moving -- people will stop drawing down their mortgages. We've already heard what Greenspan has to say about the housing debacle, and we don't believe him.

2007 Oct 04 07:04 AM

[armadillo:]

People are sitting on profits, that is what will drive the housing market lower. When someone needs to move and can't sell their house they will not have any trouble lowering the price. Unless they have used up all their equity...

2007 Oct 04 10:16 AM

[Gordoni:]

If you look closing at the chart, it suggests that we are headed back to 1990s levels of MEW. That will reduce consumer spending by $300 billion or more, roughly 2 percent of GDP. That would put us in a recession. Also, it might take consumers a year or two to burn through the equity they have already cashed in. This suggests that the real effiect of MEW/consumer spending declines has not yet been felt. Watch out when it hits.

2007 Oct 04 07:56 PM