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Friday, December 11, 2009

Q3 2009: Mortgage Equity Extraction Strongly Negative

by Calculated Risk on 12/11/2009 11:30:00 AM

Note: This is not 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.

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

For Q3 2009, the Net Equity Extraction was minus $91 billion, or negative 3.3% 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 Q3, and this was partially because of debt cancellation per foreclosure sales, and some from modifications, like Wells Fargo's principal reduction program, 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 (some disagree with this, but I think they are wrong). Atif Mian and Amir Sufi of the University of Chicago Booth School of Business wrote a piece earlier this year: Guest Contribution: Housing Bubble Fueled Consumer Spending

Findings in our research suggest ... the rise in house prices from 2002 to 2006 was a main driver of economic growth during this time period, and the subsequent collapse of house prices is likely a main contributor to the historic consumption decline over the past year.
Don't expect the Home ATM to be reopened any time soon - so any significant increase in consumer spending will come from income growth, not borrowing.