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Life After Housing's ATM

In 2003, during the thick of the housing bubble, a New York Times article discussed the virtues of cashing out home equity. One couple cashed out $40,000 for their daughter's wedding. Another "used $20,000 in equity to fly to Nepal for 10 days to celebrate their 30th anniversary." Another lucky beneficiary of the boom cashed out "$2.5 million -- $1 million to pay debts and the remainder for reasons he was reluctant to discuss."

Yes, this is old news beaten to death by the media. Early in his presidency, President Barack Obama snapped at an advisor for giving a presentation on how homeowners cashed out during the boom. "Guys, this is great research," he said, according to a staffer. "But you're telling me that people have been using their houses as ATMs. I could have told you that."

Far less appreciated, I think, is where mortgage equity withdrawal is now, and how it's affecting today's economy.

At the peak of the housing bubble in 2005, homeowners were cashing out $275 billion of equity per quarter, which amounted to nearly 10% of disposable income. This was, quite literally, as if the nation got a collective 10% raise that could be spent on jet skis, kitchen remodels, or vacation homes.

Today it's the exact opposite. Mortgage equity withdrawal has been negative for several years. That happens when homeowners pay off more of their mortgage than their scheduled payments require. In the first quarter of this year, net equity extraction was -$107 billion, or the equivalent of 3.6% of disposable income. The finance blog Calculated Risk tells the story:

The impact this has is enormous. In 2005, homeowners had $800 billion to spend in addition to what they earned, just from the amount pulled out of their homes. That was the equivalent of more than double Wal-Mart's (NYSE: WMT  ) global revenue. With MEW now running negative, Americans will have about $400 billion less to spend on consumer expenditures this year than they would if they weren't rushing to pay down their mortgages.

Now, MEW wasn't a net gain back then, and it isn't a net loss today. MEW during the housing boom meant more debt. Negative extraction today means less. Ultimately, the latter is exactly what we need to do to get back on a healthy track. But when 70% of the economy is driven by consumer spending, and when your spending is my income, the impact this stuff has on growth adds up fast. It explains most of why the economy is slow these days.

Here's what's really interesting. Calculated Risk has another chart showing what GDP growth would have been without MEW during the housing boom. It shows that the economy would have been in or near recession for most of what we considered the "boom years" had consumers not been using their homes as ATMs:

This makes me wonder: What would economic growth be like today if MEW wasn't negative? Using the same methodology as this chart, I estimate GDP growth in the first quarter of this year would have been around 3.5%, rather than the 1.9% that was reported. And as a rough rule of thumb, every 1% of GDP growth translates into about 1 million jobs. You can do the math.

Over the long haul, economic growth is all about entrepreneurs, new ideas, population growth, and productivity. The reason our economy is stagnant today is not because those key drivers are crumbling -- productivity and population growth are fairly strong. It's stagnant because what should have been a slow economy last decade frontloaded a boom by robbing growth from today through debt. Growth should be decent today, but it's not, because we're paying for last decade's frontloaded boom by paying off that debt. This is simple stuff, but sometimes the simple stuff is what matters most.

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Fool contributor Morgan Housel owns shares of Wal-Mart. Follow him on Twitter @TMFHousel. Motley Fool newsletter services have recommended creating a bull call spread position in Wal-Mart Stores. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (10) | Recommend This Article (24)

Comments from our Foolish Readers

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  • Report this Comment On July 12, 2012, at 4:25 PM, MaxTheTerrible wrote:

    "....Mortgage equity withdrawal has been negative for several years. That happens when homeowners pay off more of their mortgage than their scheduled payments require."

    Unless you are locked in at 7% and can't refinance - why would you pay more than you have to at today's all-time low rates?

    It's funny though how people's behavior tend to jump between the extremes...

  • Report this Comment On July 12, 2012, at 6:05 PM, IdaAg wrote:

    Max, it is easy and why I have been doing with both good and bad interest rates. I want the home to be mine and no one else to have control over it. Sure I can historically better rates through the stock market but with the current administration and state of world affairs I can't guarantee I'll earn more than my interest rate. Also, fluctuations in the market can make for not having enough money when you may need it but I can guarantee I'll pay off my house sooner and not have that payment and debt hanging over me. It is gratifying to be debt free and especially so with the economy and job losses. If it is my job lost I still want a place to live.

  • Report this Comment On July 12, 2012, at 6:14 PM, XMFHelloNewman wrote:

    Good article, Morgan.

    Don't forget to mention that Calculated Risk also talked about how since MEW, which is quickly becoming my favorite sounding acronym, can be spent on imports it might not have such a great effect on GDP:

    It's possible that our trade partners might feel the missing 1.6% in GDP you calculated for the beginning of the year more than us...

  • Report this Comment On July 12, 2012, at 6:52 PM, maiday2000 wrote:

    I wonder what GDP growth in the 90's up to 2000 would have been without the stock market bubble? I can guarantee it was a lot less than portrayed on the chart. Real GDP Growth has been anemic for a long time - which is why we are in a protracted period of austerity. The current growth is also a giant mirage funded by unsustainably high levels of government debt that has not led to any sustainable wealth creation.

  • Report this Comment On July 12, 2012, at 7:28 PM, TMFDarwood11 wrote:

    When people were using their home equity as a ATM I quipped that this was juicing the economy and when the money stopped flowing there would be hell to pay. And there was!

    I too took out a home equity loan in 2007, in anticipation of the end of the cash station. I got a great deal with no fees and 1/2 point above prime. The banks back then were still tripping over each other to sign up people. However, I have never used the line of credit, it's good for another 10+ years and if I should decide to use it, it'll be good for another 20. It's part of my "emergency" or unexpected financial problems plans. I suspect there are a lot of other people out there who did the same thing.

  • Report this Comment On July 13, 2012, at 3:14 AM, knighttof3 wrote:

    Your spending is not my income - it's China's income. I, a typical American, don't have a job :-)

    All kidding aside, the economy is stalled because the government keeps giving money to banks and not businesses - because Wall Street has bought both parties fair and square. The outcry was loudest when government bailed out automakers. Where was the outcry when it gave Citibank $25 billion and the same year, Citi paid out $27 billion in "contractually guaranteed" bonuses? They should have told Citi bankers - "go collect on your contracts in the bankruptcy court!" Same with taking over AIG so Goldman Sachs could get paid in full. These actions have done NOTHING to juice economic activity. The Fed and the Treasury are not idiots, they are servants - not of public but of banks.

    The whole point of trillion-dollar deficits should be to sink money in infrastructure and public works programs. Instead we get treasury issuing bonds at 4% that banks can buy using 0.25% loans from the Fed, making free money. Why would banks lend to businesses that can fail? The US government bonds will never default, right? Right?

  • Report this Comment On July 13, 2012, at 8:13 AM, FelixHoenikker wrote:


    Thanks for the macro view of the housing bubble ATM. As someone who dislikes personal debt of any knid, I never took equitity out of my home during the 90s or 2000's. This resulted in my lifestyle being crimped relative to my peers who were withdrawing from the real estate ATM. But now, I own 5/6s of my home based on the current depressed value, and expect to pay it off in about two years.

    Then I will have to do something about taxes which I dislike even more than debt.

  • Report this Comment On July 13, 2012, at 8:36 AM, BMFPitt wrote:

    "Another lucky beneficiary of the boom cashed out '$2.5 million -- $1 million to pay debts and the remainder for reasons he was reluctant to discuss.'"

    If he was comfortable talking about being a million dollars in debt, I'd love to hear about that other stuff.

  • Report this Comment On July 13, 2012, at 10:17 AM, Lucaskasan wrote:

    A big part of the problem was that banks granted these loans without looking at their collateral. For just one example among countless others, my neighbor two doors down got a $500,000 home equity loan on his house, an uninhabitable "fixer" (according to public records) and took off. The house was sold at auction a month ago. Banks could have prevented much of the problem by simply getting off their duffs and driving out to look at the proposed collateral instead of relying on so-called paper appraisals to support fantasy values.

  • Report this Comment On July 23, 2012, at 12:22 AM, critter88 wrote:

    Some of these "ATMers" have done quite well. My mother-in-law lives in a working class neighborhood in southern California. They are cookie cutter homes. Her neighbor did a cash out refinance and bought a new car, remodeled the house, bought nice furniture, and went on nice vacations. Fast forward 8 years. Due to pressure from the Obama administration and California's liberal government, the bank reduced the principal balance - the neighbor's mortgage debt has been reduced down to almost her pre-ATM debt. My mother-in-law still lives in the same outdated home. Her neighbor got a car, furnitures, vacation, and remodel home today. Being financially irresponsible aint' so bad in this country and even golden in California.

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