Thursday, February 15, 2007

 

Mortgage Equity Withdrawals: The numbers

I thought I should give you the numbers to illustrate how much MEWs have added to the economy.

The sharp increase in prices of homes during 2004 and 2005 helped households support their expenditures by enabling large mortgage equity withdrawals amounting to $544 billion in 2004 and nearly $600 billion in 2005.

The recent sharp drop in home prices has reduced the volume of mortgage equity withdrawals to an annual rate of $215 billion in the third quarter of 2006 (see chart 2) from a peak rate of $730 billion in the third quarter of 2005. This significant reduction has trimmed the pace of consumer spending. Further reductions in home prices are predicted to translate into soft growth in consumer spending in 2007.

Assuming MEW continue to fall we are talking about half a trillion in spending that consumers will not be doing in 2007 that they did two years earlier. In the comments to this post I wondered what was going to drive economic growth sans MEW and, to be honest, I must conceed that there is undoubtedly some wealth effect from the stock market which has rallied 20% since mid-2006. That has to be worth a couple of trillion and undoubtedly mitigates flat to declining home prices. Maybe this is how it will work out. Stocks then homes boom in price forever allowing asset owners to finance an ever increasing standard of living. Or not.

When this stock market rally looks like it is ending, and it doesn't right now, then I owe you a post outlining specifics on how the impending financial disaster I keep predicting should unfold. Suffice it to say, I am more than a little embarrassed that the depression did not start in 2002. Five years on with economic conditions pointing to at least a slowdown this year I will have to hang up the bear suit if we weather this economic storm.

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