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After the Refinancing Boom: Will Consumers Scale Back Their Spending?
|January 12, 2004|
|Note To Editors||
The latest edition of the Federal
Reserve Bank of New York’s Current Issues in Economics
and Finance is available: After
the Refinancing Boom: Will Consumers Scale Back Their Spending?
The authors present evidence that the financial status of consumers has not deteriorated during this refinancing boom. Data show that consumers have used their withdrawn home equity to restructure their balance sheets and reduce their debt service burdens. The authors find that this period of equity withdrawal has been accompanied by a slowing in the rate of increase of non-mortgage household liabilities, an increase in the personal savings rate, and a reduction in a comprehensive measure of household debt service burdens relative to disposable income. As a result, households may be in a better position to spend in the years ahead.
In recent years, home equity withdrawal in the United States has reached unprecedented levels – with more than one out of every four home mortgages in this country refinanced in 2003 – while consumer spending has provided important economic stimulus. Therefore, some analysts have predicted that when interest rates rise and the refinancing and equity withdrawal boom ends, consumers will be strapped for funds and sharply curtail their spending.
The authors assert that during this boom of mortgage refinancing
and equity withdrawal the pace of consumer spending remained
consistent with prior periods; despite the availability of
additional resources through refinancing and equity withdrawal,
consumers did not spend a greater proportion of their disposable
income on consumption.
Margaret M. McConnell is a senior economist and Richard W.
Peach is a vice president in the Bank’s Research and
Markets Analysis Group. Alex Al-Haschimi, formerly a research
associate in the Research and Market Analysis Group, is a
graduate student in economics at Oxford University.