Press Release
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?

Despite some concerns that the recent surge in home equity withdrawal associated with mortgage refinancing could leave consumers in a weakened financial state that may dampen spending when interest rates rise and the refinancing boom abates, authors Margaret M. McConnell, Richard W. Peach, and Alex Al-Haschimi conclude that such factors are unlikely to cause consumer spending to suffer.

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 Data show that consumers have used their withdrawn home equity to restructure their balance sheets and reduce their debt service burdens.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.

The authors also contend that, in addition to the relative improvement in household finances, consumer spending will be driven by other forces once interest rates increase, since such an increase would occur as a result of additional growth in the economy.

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.

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