Bill McBride tracks data on mortgage equity withdrawal as a percentage of disposable income. You withdraw mortgage equity when you take out a second mortgage or refinance your existing mortgage with a larger loan (“cash-out refi,” as we call it). The graph at the link shows how from 2002-2007, the withdrawal rate was between 4 and 9 percent each quarter. Ordinarily, the number should be slightly negative, as people pay down the principal in their mortgages. We had big negative numbers in 2009-2011, “mostly because of debt cancellation per foreclosures and short sales, and some from modifications.”
Thanks to a commenter for the pointer. Some further comments:
1. From an AS-AD perspective, you can say that mortgage equity withdrawal boosted AD from 2002-2007, and then it went into reverse when the subprime crisis hit. This might be the best story for the drop in AD.
2. From a PSST perspective, you can say that a lot of consumption patterns were unsustainable, based on people spending capital gains on housing. When the capital gains leveled off and then turned into capital losses, the economy needed to find new patterns of trade, and it still has not done so.
3. Apropos of nothing, I once cursed out the guy who developed the measure of mortgage equity withdrawal. In about 1982 or so, Jim Kennedy was the forecaster for Industrial Production, and I was the forecast co-ordinator (we were both economists at the Fed). The forecast process, which was pretty much all clerical, was time-consuming and grueling. I had finally put a forecast to bed when Jim came in and said that the forecast for Industrial Production was out of synch and needed an update. He was very concerned about who might be blamed for the glitch. I shouted, “I don’t care whose bleeping fault it is!” I really lost my temper. It was just a case of my being tired, still at work long after I usually went home, and caught off balance by having my relief at being finished turned to anguish at finding that there was more work I had to do.
No sure what you mean by “ordinarily, you expect the number (mortgage equity withdrawal) to be negative.” Surely, with average home price increases and stable interest rates, individual homeowners gradually accrue excess equity that can be cash rifi-ed? Really it’s the combination of high LTV products, declining interest rates and sharp home price increases that allowed a number that should be very low single digits per annum turn into an unsustainable high teens plus number in the mid 2000’s.
For #2, isn’t it something more like:
During the run-up in the ‘bubble’ marked-to-market capital gains in housing were consumed in various ways without the capital gains actually being realized. When the ‘bubble’ collapsed those marked gains became clearly impossible to realize, and so the activity they fueled fell dramatically. Further, the use of unrealized capital gains to fund various things meant that when the marks’ corrected, many household balance sheets were suddenly horribly out of sorts.
I think this gives the same AS/AD, and PSST stories. It also give a “balance sheet recession” story.
Or am I misunderstanding what is actually being measured?
I am guessing that your forecast process was not computerized at the time. In my career as an actuary, I made the jump from paper spreadsheets to lotus 123 in 1985. No more pain of having to recalculate an entire paper spreadsheet due to an error in one early entry.
Of course, a computer allowed me to make more sophisticated errors.
OMG, talk about a flashback: the birth of the spreadsheet era.
Except we used the cheaper knockoff, QuattroPro.
*computer* spreadsheet era.
Actually, even for some of us in our 50’s, a “spreadsheet” is a body of software and the paper things you used before (which some of us didn’t realize existed until a full decade into the PC era) – those things would be *paper* spreadsheets….
They are stored next to the drafting machines and electric typewriters….
Heh. I used to keep track of monthly household expenses in a 13-column ledger book.