Sunday, March 29, 2009

Personal Saving and Mortgage Equity Withdrawal

by Bill McBride on 3/29/2009 03:42:00 PM

Much has been made about the personal saving rate falling to zero during the housing bubble, and rising sharply in recent months. This decline in the saving rate was probably related to homeowner's borrowing against their homes.

During the housing bubble there was a huge surge in home equity borrowing or cash-out refinancing - commonly called mortgage equity withdrawal (MEW) - that led many people to spend more than their usually defined disposable personal income (DPI). (ht Professor Martha Olney)

However this didn't capture MEW. The following two graphs show the impact of MEW. Note: I used 50% of MEW, because that appears to be the amount consumed.

Personal Saving MEW Click on graph for larger image in new window.

The first graph shows disposal personal income (blue), disposal personal income plus MEW (green) and personal outlays (red). Note: Graph doesn't start at zero to better show the change.

The BEA defines personal saving as the difference between the blue and red lines:

Personal Savings = Disposable Personal Income - Personal Outlays

However many people acted as if MEW was income, and that would mean personal saving was the difference between the green and red lines.

Saving Rate MEW The second graph shows the same data except as a saving rate.

As Professor Olney mentioned to me, the aggregate saving rate captures the behavior of both savers (who probably didn't change their behavior) and "dissavers" (who borrowed heavily). The saving rate declined to zero, probably because the dissavers were using MEW as income.

Now that the Home ATM is closed, the saving rate is rising because of less borrowing - as dissavers are forced to live within their incomes.

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