NCPA - National Center for Policy Analysis

The Economy And The Home Refinancing Connection

July 26, 2001

Economist have been puzzled by the continued spending of American consumers, even as the economy has wobbled to a near standstill and more layoffs are being announced. Not incidentally, that spending has been credited with helping keep the U.S. out of an outright recession.

Now they think they may have discovered the answer: the spending has continued courtesy of an increasingly popular technique known as cash-out mortgage refinancing. In other words, Americans are taking advantage of the increasing value of their homes to borrow money for shopping sprees.

  • Consumer spending increased at the annualized rate of 3.1 percent in the first five months of this year.
  • Economists figure that all the refinancing activity contributed nearly half of the 1.2 percent annualized growth of gross domestic product in the first quarter.
  • The consulting firm Economy.com estimates that mortgage loans with a value of $495 billion were refinanced during the first six months of this year -- and consumers have extracted about $33 billion in cash from those transactions.
  • Both amounts are nearly three times as high as for the same period last year.

This is an attractive time for homeowners to refinance. Nationwide, home prices climbed 8.9 percent last year, according to the government. This was the strongest annual gain in housing prices since 1979.

Meanwhile, rates for a 30-year fixed-rate mortgage have hovered around 6.9 percent to 7.2 percent this year -- compared to an 18-month high of 8.6 percent in May 2000.

Source: Patrick Barta, "A Refinancing Boom Helps Explain Strength of Consumer Spending," Wall Street Journal, July 26, 2001.

For text (WSJ subscribers)

http://online.wsj.com/articles/SB996094280978899960.htm

 

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