After years of piling debt on their homes, Americans are becoming more cautious about using them as a piggy bank. A cooling housing market and higher interest rates have made homeowners more reluctant to tap the equity they may have built up in their residences. The amount borrowers owe on their home-equity lines of credit has slipped in the past six months, to $561 billion at the end of March, the first such decline since 1999, according to new data from Equifax Inc. and Moody's Economy.com Inc. Although that decline was partly offset by a pickup in fixed-rate home-equity loans, total home-equity borrowing rose just 9% in the 12 months through March, well below the 21% average annual growth rate of the past five years.
That was from yesterday's WSJ. The last sentence is particularly amazing to me - the growth in equity extraction was 21% per year over the last 5 years?! This is bad news for the economy. Not unexpected, but bad news for sure. If people stop extracting equity from their homes, they will be unable to pay off their credit cards which is the funding mechanism they've been using to continue their consumption beyond any reasonable or rational limit (the current US savings rate in negative for the first time since the Great Depression). If they can't pay off their credit cards, they can't spend because they have no other method to pay for it. Net-net, the economy comes screeching to a halt.
This is from today's WSJ:
The U.S. economy slowed sharply in early 2007, retreating to its weakest pace in four years under the weight of the housing slump, while inflation accelerated... The surprisingly anemic pace lagged the fourth quarter's rate of 2.5% and reflected the slowest growth in GDP since 1.2% during the first quarter of 2003. Price-inflation gauges rose sharply in the first quarter. For instance, the price index for personal consumption expenditures rose by 3.4% after decreasing 1.0% in the fourth quarter. The PCE price gauge excluding food and energy grew 2.2%, after increasing 1.8% in the fourth quarter.
This is a double-whammy. With the economy slowing, job gains and income gains will likely cool as well, but at the same time the Fed, being laser-focused on inflation will feel some pressure to raise interest rates, which would ripple though the, yes, the housing market raising everyone's adjustable mortgages and lines of credit. It's a very tough place to be in when you simultaneously have a slowing economy and rising inflation because the levers that can help one will harm the other.
This is going to get really, really ugly.
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