Nouriel Roubini's Global EconoMonitor

Life Without Home Equity (Withdrawal) – Down to $24bn in Q1 2008

(this piece is also featured on Nouriel’s Roubini Global EconoMonitor)

In an RGE note (available for RGE Monitor clients only) published last year with Nouriel Roubini, we analyzed the link between home equity withdrawal (HEW) and personal consumption.

The developments in the U.S. housing market clearly had a strong impact on the pattern of private consumption in the last few years. However, the mechanisms that link changes in observed home prices directly to consumption are still controversial. One school of thought argues that the housing boom just generates an old-fashioned wealth effect: as home prices rise, consumers feel richer, spend more and save less. Another school argues that financial innovations have relaxed credit rationing constraints and made HEW easier. Thus the wealth effect of housing would manifest itself via an increase in HEW.

The empirical debate on the impact of HEW on consumption hinges on whether the proceeds from HEW drive consumption or whether the apparent correlation between HEW and consumption is really due to the wealth effect of rising property prices. In the second case, consumption would have been just as high even in the absence of large HEW figures. The debate is especially relevant in understanding the impact of the U.S. housing recession on consumption – and therefore on the saving rate. We believe the sharp increase in home prices of the last few years could have had a temporary effect on consumption additional to the one of the more traditional direct wealth effect. The relaxation of borrowing constraints coupled with rising home prices created ground for strong equity extraction. Very likely, the incentive to boost (temporary) consumption was stronger for younger households with lower incomes, as well as for borrowers that were initially credit constrained.

At the time (April 2007) we had quarterly data until the end of 2006 and we were one year into this housing recession (housing starts peaked in January 2006 at 2.3 million and now, two and a half years later, are down to 1 million).

We looked at both the wealth effect of falling home priced and falling HEW and we kept the two effects separate.

When analyzing the wealth effects of falling home prices we had to make some (educated) assumptions on how far down home prices could go. At the time, according to the S&P Case-Shiller index (Composite 10, Composite 20) home prices had already fallen about 8% (our computations rely also on the assumption of a 5% increase for both nominal GDP and disposable income. This 5% nominal growth of GDP is consistent with a 2.5% growth in real GDP and a 2.5% inflation rate). We depicted different scenarios and the results are summarized in the tables below. Our scenarios differ depending on the assumed decline in home prices and the magnitude of the wealth effect. Given the results in the literature presented in the table above we assume values of the wealth effect that vary between 4.5% and 9%.



We found that a 10% fall in home prices could have an impact that goes from 0.99 to 1.97% of GDP. Cleary, the outcome would get much worse in the case of a sharp 20% drop in home prices. In this case, the heavy toll on GDP coming from the negative wealth effect would range from 1.6 to 3.3%.

Now, prices have fallen about 20% since July 2006 when they peaked and looking at indicators like price/income ratio or price/rent ratio a further 15% fall in home prices should not come as a surprise; especially since inventories are still at a record high and foreclosures are mounting adding to the glut of supply that puts downward pressure on prices.

But the wealth effect, though present and significant might be only part of the story that links the housing boom to personal consumption (which went from an average of 67% of GDP in the 1990s to 71% of GDP now – and about one fourth of world GDP).

In the 1990s HEW averaged about 14bn. It started to increase sharply at the end of the 1990s and peaked in Q3 2005 when it reached an annualized $714.5bn per year. It has been declining ever since, falling all the way to $157bn in Q4 2006 which was the last data point we had available. Again, to analyze the possible effect of a fall in HEW we depicted different scenarios.

Estimates of marginal propensity to consume out of an additional dollar in HEW vary between 10 and 50%

HEW drops to $140b


HEW drops to $60b


HEW drops to $0b


Now, according to our estimates HEW is down to $24bn (annualized) in Q1 2008, the lowest reading since the 1990s. And most likely it will not rebound very soon as home prices keep falling pressured by mounting inventories.

And whether HEW is the driver or not, the slump in demand is evident not only from the slowdown of the growth rate of personal consumption (from 3.9% in Q1 2007 to 0.9% in Q1 2007 and then 1.5% in Q2 2008) but also from the fact that the (negative) growth rate of imports was the largest contributor to GDP in Q2 2008 (import fell 6.6% and their contribution to GDP was 1.3% – over two-thirds of the GDP growth in the Q2 was due to the decline in imports).

Personal consumption growth might very well turn negative in the next quarter as a result the erosion in credit quality and of the tightening of the credit conditions (the Fed’s Loan Officer Survey shows that the banks willingness to lend to consumer is at a 28-year low – this would mark the first consumer recession since the beginning of the 1990s.




Note: Technically, HEW equals cash-outs from refis, plus originations of mortgages to finance purchases of existing homes, minus debt canceled from homes sold, plus the change in home-equity debt outstanding, minus unscheduled repayments of mortgage debt (minus mortgage transaction fees and taxes). An official statistic that tracks HEW for the U.S. does not exist. We derive ours from the Fed’s Flow of Fund Reports. The approach adopted here to compute HEW is based on the fact that only part of households’ residential investments (line 13 of table F.100 in the Fed’s Flow of Funds) is backed by loans (mortgages). We multiply households’ residential investments by the loan-to-price ratio1 and subtract that from the flow of home mortgages of the period considered (line 40 of table F.100 in the Fed’s Flow of Funds). We believe this measure provides an accurate picture of the magnitude of HEW.

33 Responses to “Life Without Home Equity (Withdrawal) – Down to $24bn in Q1 2008”

DanAugust 28th, 2008 at 8:03 am

What is the basis for not believing the official statistics about the GDP rebounding by 3.3% in Q2?Does anyone have better and more reliable sources?

GuestAugust 28th, 2008 at 8:33 am

GDP number is part of Election year hoax.This report is similar to the intelligence report which let us to IRAQ war.Same govt , and same set of people !!

AnonymousAugust 28th, 2008 at 8:51 am

Don’t look now, but it’s the amazing rebounding dollar first thing every AM, out of thin air! Step right up folks, to rigged GDP numbers, rigged CPI statistics, and anything else we can make look beter through hedonic means, you too can support a bogus artificially proped up PPT driven event every morning. Here’s,…Johnny!!To do your part:Please visit your local dealer and immediately purchase an overbloated, overpriced and unneeded vehicle of your choice to suppport your articially sstimulated economy. To get on our preferred list please visit your nearest empty mall regularly and max out and charge up any and all credit cards you may have or can obtain at your favorite retail stores.

maynardgkeynesAugust 28th, 2008 at 9:01 am

I suspect that a most of the HEW was being to used to help to meet the payment on the first mortgage rather than for personal consumption. This makes for a different impact from the one that the author suggests. In other words, homeowners who were strapped to meet their first mortgage payments were buying time by taking a HEW, while at the same time hoping for the further home appreciation, which would allow them to keep the merrygoround going by folding their existing HEL into a subsequent and probably larger HEL. If that is true, and the merrygoround has now stopped, the situation makes the prospects for more jingle mail much more dire, but suggests that the actual impact on personal consumption spending is likely to be muted, since the HEW wasn’t being spent on personal consumption items in the first place. Indeed, one must ask, with all that easy money available, why was inflation so low outside the housing market? The answer is that the HEW was going into more leverage of the housing investment, and not into consumption. Which means that we will see something worse than a slowdown in consumer spending — an upsurge of jingle mail, foreclosure, and house price collapse.

GuestAugust 28th, 2008 at 9:08 am

The GDP deflator was only 1.2%!! The lowest inflation reading in GDP in 11 years!!! Even with inflation numbers running at 30 year highs!!!!! Even with export growth and the large revision, the official number should have been -.90%!!!! THIS IS OUTRAGEOUS!

GuestAugust 28th, 2008 at 9:13 am

Look at teh outright LIES in the headlines the sheeple are fed!!!! WAKE UP AMERICA!!!FOX Business: Stimulus Checks Created 3% Boost

GuestAugust 28th, 2008 at 9:52 am

why the hell is the Dow up 145 points? Oil suddenly doesn’ matter anymore? Sh%ty earnings don’t amtter anymore? Wider credit spreads than last year don’t matter anymore? Bankruptcy’s up to 1 million doesn’t amtter anymore? Falling US Peso doesn’t amtter anymore? Negative real interest rates even greater than the ’70’s stagflation don’t amtter anymore?

GuestAugust 28th, 2008 at 9:53 am

This won’t matter then I guess:10:50 a.m. Hanna is eighth-named storm of the Atlantic hurricane season10:50 a.m. Tropical Storm Hanna forms in the Atlantic

GuestAugust 28th, 2008 at 10:11 am

what’s not in the headlines doesn’t matterin the headlines: GDP growth 3.3% (annualized)not in the headlines: inflation 4.2% (annualized)debt increase due to stimulus: 520 billion (if annualized), = 3.6% of GDPwhat that number of 3.3% stands for, I don’t know, not for something tangible, I guess

Business ManAugust 28th, 2008 at 10:14 am

Looks like Toyota concurs with this analysis.Toyota cut its 2009 vehicle sales forecast by nearly 7 per cent due to a severe downturn in Western markets…

ptmAugust 28th, 2008 at 10:20 am

It was the best of times, it was the worst of times; it ws the age of wisdom, it was the age of foolishness; it was the epoch of belief, it was the epoch of incredulity; it was the season of Light, it was the season of Darkness; it was the spring of hope, it was the winter of despair; we had everything before us, we had nothing before us; we were all going directly to Heaven, we were all going the other way. Economy: Growth Faster Than Initially Estimated on Exports WILLIAMS’ SHADOW GOVERNMENT STATISTICS, FLASH UPDATE, August 28, 2008 – Gross Domestic Income (GDP Equivalent) Is in Formal Recession – New Orders for Durables Goods Sank Year-to-Year

GuestAugust 28th, 2008 at 10:26 am

For those of us who can’t afford to subscribe to Shadowstats, could someone post the key elements of today’s flash update?

AnonymousAugust 28th, 2008 at 10:26 am

The Incumbent Party is pulling out all stops into the election.Should be really ugly after, though, as there is a scramble by the new Administration to bring forth all the bad news, so as to make sure it gets blamed on the former residents, not them.You can just hear them talking about “The Bush Recession” and “The Bush Credit Crisis”.

GuestAugust 28th, 2008 at 10:33 am

Official American data more and more look like coming from bubble blowing country, reminding of a little story:“THE OX AND THE FROG”fable by Jean de La FontaineAs small as a hen eggAn envious little frogSeeing a bulky oxStarts swelling and swellingTrying to be as big as he is.-“Look at me now – exclaims she puffed up:-“Am I now as big as you are?”-”Not enough,my old friend.”- And she keeps on swellingAnd stretching and straining, enlargingtill she bursts as a bladder.Folks all show and no substance,Ambitious and brainless men,Or people despising their own right place,How many people as this frog are!Putin (like many others), in the mean time, watches the frog doing his tricks and with a smile on his face he already has given a signal that he’s not that much impressed.

GuestAugust 28th, 2008 at 11:20 am

Look at this great chart showing the unprecidented disparity between headline inflation and the GDP deflator

GuestAugust 28th, 2008 at 11:22 am

Why is oil tanking? The hurricane is still forcast to hit all the oil rigs in the gulf! Are they going to release the strategic reserves? I can’t keep up with all of this illogical price movement anymore.

ptmAugust 28th, 2008 at 11:37 am

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS, FLASH UPDATE, August 28, 2008 – parphrased.Gubmint (BLS) gimmicked revisions for the second quarter show growth of 3.28%. And year-to-year growth was revised to 2.17%, but even that was down from BLS’ first quarter’s 2.54% estimate. Calculations employ “unbelievable” low second-quarter inflation rate of 1.33%, versus 2.56% used the BLS’ first quarter calculations. These revisions were dominated by highly questionable trade data. (As you can see the politicized BLS is even getting mild-manner, overly polite, and understated John Williams upset!)Gross Domestic Income (GDI) measure, the theoretical income-side equivalent to GDP measure, however is in recession. Annual growth decreased from 0.8% in the fourth quarter 2007, to 0.7% in the first quarter 2008, and decreased again to 0.3% in the second quarter 2008. Traditionally, two consecutive quarterly contractions in GDP (the same for GDI) have constituted a formal recession. The GDI contracted in the fourth and first quarters.Even though new orders for durable goods have move up and down, they are down a significant 4.5% Year/Year. Also, such an up/down pattern in durable goods orders has not been seen outside of a recession.Williams thinks we will continue to see volatility for gold, the U.S. dollar, and domestic equities. And he thinks it is unlikely that we have seen the near-term high in oil prices, in fact, Gustav could double gasoline prices.Williams: Over the near-term, negative major market displacements likely will follow or be accompanied by intense, broad selling of the U.S. dollar. An eventual, increasing flight-to-safety outside of the U.S. dollar also should include flight-to-safety into gold. Despite recent relative softness in oil prices, anything above $90 per barrel remain highly inflationary. The gold and currency markets also remain subject to extreme near-term volatility, jawboning and both covert and overt central bank intervention. Over the longer term, U.S. equities, bonds and the greenback should suffer terribly, while gold and silver prices should boom.

SeanAugust 28th, 2008 at 12:16 pm

Can anyone tell me where is the typical Roubini’s blog?I want to view the page just with all Roubini’s article, instead of contributions from other authros.Thanks

kilgoresAugust 28th, 2008 at 12:45 pm

@ Sean on 2008-08-28 12:16:06At the top of this page on the right-hand side, you’ll see a column titled, “Nouriel Roubini’s Global EcoMonitor.” Most of the articles are by Dr. Roubini, but some are written by other contributors.SWK

London BankerAugust 28th, 2008 at 1:02 pm

@ SeanDr Roubini has invited select guest bloggers to provide content here so that he can take a day off every now and then. He wrote about this a couple days ago. The guy hasn’t had a proper holiday in more than a decade. Give him a (well deserved) break, and give some respect to the guest blogger trying offer us some interesting stuff we wouldn’t see otherwise.

iNnOsInZAugust 28th, 2008 at 2:09 pm

@ London Banker”and give some respect to the guest blogger trying offer us some interesting stuff we wouldn’t see otherwise”Word!

GuestAugust 28th, 2008 at 2:39 pm

What Putin is here quoted as saying does not surprise me at all. After all, as someone here stated earlier, Iraq had transgressed International Law that was written mainly by US and UK and became thus subject to being attacked by the same countries.In other words it would not surprise me if the very same two countries did basically what-ever to push through their own agenda.Putin says suspects U.S. provoked Georgia crisisRussian Prime Minister Vladimir Putin said on Thursday he suspected unnamed persons in the United States had provoked the conflict in Georgia in an attempt to help a candidate in the U.S. presidential election…. …Putin said:”If that is true, if that is confirmed, then that’s really bad. It’s very dangerous and a mistaken policy.”It that was the case, then the recent events could have a American domestic political dimension,” he said in the interview.”If my suspicions are confirmed, in that case the suspicion arises that somebody in the United States has intentionally created this conflict with the aim of making the situation more tense and creating a competitive advantage for one of the candidates fighting for the post of U.S. president.””If that was the case, it’s nothing less than the use of so-called administrative resources in a domestic political fight, in its worst, bloody dimension.”(source:

GuestAugust 28th, 2008 at 2:45 pm

According to this article, U.S. economy grew by 3.3% in the second quarter:Economy grew more than expected during second quarter according to this article, the real rate of inflation in U.S. is about 15 percent per year:Inflation Rate is 5.6%… and Other Nonsense summary the actual growth in the U.S. is something like -10%.

the GuestAugust 28th, 2008 at 5:02 pm

When you look back at the bubble of HELOCs and HEWs, the banks were courting consumers to tap into these ‘collateralized’ loans because of inflating home ‘values’ in order to pay off their credit card balances at better rates. So borrowers loaded up on these HELOC/HEW loans paid off credit cards. Then the banks increased the credit lines of credit cards so borrowers would use their cards and CC debt increased. So there were two bubbles: mortgage debt and CC debt. Borrowers generally IMO didn’t even ask for increased CC limits. The banks just sent statements that limits were increased. Consumers didn’t even have to ask for increased credit availability!Now the letters come to borrowers that their home appraisal when they got a HELOC was no longer valid and the line of credit on their home has been frozen or reduced. Because homes values have plummeted because they became unsustainable bubble prices financed by unsustainable ‘exotic’ ARM mortgages and undocumented Alt-A exploding ARM loans. CC companies are now sending out letters that CC credit lines are being reduced.This a classic credit expansion and credit contraction. But it was driven by the bank’s aggressive marketing and issuing of high credit limits. The bank’s now expect borrowers to repay their HELOCs although the banks are saying the home value does not cover the HELOC.I wouldn’t blame this whole credit bust on consumers although they took ‘advantage’ of higher limits and easy-to-get HELOCs. They robbed Peter to pay Paul.But by strangling consumer credit at a time when consumers are pinched and strapped and deeply indebted will actually increase defaults. People use credit when income is variable or unpredictable to get through the lean times. There’s no way out of more consumer insolvencies since the rug has been pulled. The debt servicing became reliant on the use of credit to pay balooning debt! The continued rollover of consumer debt has a big problem now. There’s no juice left to stay afloat.Delinquent HELOCs will prevent mortgage workouts also and kill short sales. The bubble cames from unregulated easy lending and underwriting. This mess was predictable but it happened anyway. What is the Federal Reserve doing? Well loaning more fiat money to insolvent banks and lenders with the open window for garbage mortgage debt collateral. So more easy lending on suspect or garbage collateral.But this taking of toxic derivative debt for loans may end and the Federal Reserve would pull the plug on the credit life support for the banks. Just as the banks are pulling the credit life support for the consumers. Then the consumers turn around and default on debt owed to the banks. It’s a vicious credit crunch crisis. The question is: Was this a just random sequence of Black Swan events?

AnonymousAugust 28th, 2008 at 7:17 pm

The banks, despite their giveaways from the Fed, are desperate for cash and need to decrease credit lines for _that_ reason (as well as lack of confidence in the collateral and the borrowers). In fact they are so desperate they would rather foreclose and flip the house at a loss than delay foreclosure, apparently. They are very unforgiving these days to borrowers who are overdue.If the Fed pulls the plug on support of the banks, which they _should_ do because it’s unfair to everyone else to support only the banks, the banks will have to be nationalized or resold and many depositors repaid thru FDIC. The cost of that repayment might not be as much as the freebies given to banks now, and it would clear the field for new banking institutions and arrangements to arise in place of the old busted ones. In other words, capitalism rather than socialism-only-for-banks.

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