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Tuesday, October 21, 2008

Mortgage Equity Withdrawals All but Cease

Great write up of the struggles that U.S. consumers face by John Mauldin. If you don't subscribe to his e-letter commentary, I recommend you do. One specific area of concern lies with the inability of the U.S. consumer to tap their home equity going forward. Per John:

The second quarter of 2008 saw an anemic $9.5 billion. At that run rate, we could see a drop-off of over 90% from 2005! Now, think what the second quarter would have been without the federal stimulus program of $150 billion. It might have looked and felt like this quarter!
Digging a bit deeper into Net Mortgage Equity Withdrawal "MEW", we see just how much U.S. homeowners tapped into their homes (think ATM machines) when values were rocketing. The ability of homeowners to monetize the capital appreciation of their homes offset the stagnant wages we have seen over the past 7-8 years. Unfortunately, MEW has now come to a screeching halt (YTD 2008 in the chart below is through Q2).

In fact, MEW reached upwards of 8% of net income back in 2006, but has now crashed to less than 1%. Is this finally the end of the U.S. consumers ability to be resilient in the face of economic turmoil or just the trigger for another stimulus package?