Thursday, March 11, 2010

Q4 2009: Mortgage Equity Withdrawal Strongly Negative

by Bill McBride on 3/11/2010 02:32:00 PM

Note: This is not Mortgage Equity Withdrawal (MEW) data from the Fed. The last MEW data from Fed economist Dr. Kennedy was for Q4 2008. My thanks to Jim Kennedy and the other Fed contributors for the previous MEW updates. For those interested in the last Kennedy data, here is a post, and the spreadsheet from the Fed is available here.

The following data is calculated from the Fed's Flow of Funds data and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity (hence the name "MEW", but there is very little MEW right now!), normal principal payments and debt cancellation.

Mortgage Equity Withdrawal Click on graph for larger image in new window.

For Q4 2009, the Net Equity Extraction was minus $75 billion, or negative 2.7% of Disposable Personal Income (DPI). This is not seasonally adjusted.

This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.

The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding declined in Q4, and this was partially because of debt cancellation per foreclosure sales, and some from modifications, and partially due to homeowners paying down their mortgages as opposed to borrowing more. Note: most homeowners pay down their principal a little each month unless they have an IO or Neg AM loan, so with no new borrowing, equity extraction would always be negative.

Equity extraction was very important in increasing consumer spending during the housing bubble and I don't expect the Home ATM to be reopened any time soon. So any significant increase in consumer spending will come from income growth or a lower saving rate, not borrowing.