Can you eat your house?
As I mentioned yesterday, the US personal savings rate has reached the Rubicon. In June 2005 we as a country officially saved 0.0% of our disposable (i.e. after-tax) personal income.
The Great Vanishing American Savings Rate has been a long time coming, but the pace has really picked up over the last two years. Since June 2003, real DPI has risen 6.04% while real personal consumption expenditures have gone up 8.27%. So no surprise, really, that our personal savings rate has tanked from a very meager 2.0% down to nothing at all.
All this spells potential danger for the US economy, of which 70.1% (during Q2) is consumer spending -- not far from the all-time high of 70.5% in 2003Q1. No longer can US consumer spending grow faster than US income growth. Or can it?
Freddie Mac tells the story (via CNN/Money):
In the quarter ended June 30, 74 percent of Freddie Mac-owned loans that were refinanced resulted in principal amounts larger by at least 5 percent.Now those in the know tell us that most of this money is being spent on home improvement, thus keeping the loan-to-equity value ratio after refinancing to around 70%. Yet whether it's spending on the house or on a vacation to Disneyworld, the US economy is going to be counting more and more on precisely this kind of equity withdrawl to boost consumer spending.
Only 9 percent of refinancings resulted in lower loan amounts.
In other words, nearly three-quarters of homeowners refinancing a $100,000 loan wound up with a loan principal of at least $105,000, usually more...the difference between the size of the old loan and the new loan is being taken out in cash.
In 2003, that was the case only 33 percent of the time. Back then refinancing was rate driven, according to Bob Moultin of Americana Mortgage Group. Homeowners reworked mortgages to take advantage of lower interest rates so they could reduce their monthly bills.
Now they refinance to put cash in their pockets or to pay for big purchases.
And thus the American economy becomes ever more dependent on not simply construction, but on the rising value of all homes. As the ultra-easy money vanishes from the mortgage market (1-year ARMs up to 4.46% now from 4.24% just four weeks ago, and the spread between them and the 30-yr. FRM is down to around 130 basis points), values are going to have to rise steadily to entice those who refinanced in 2003-04 to jump into the refi market yet again. Rates on 15-yr. FRMs are up 22 basis points from four weeks ago, and rates on 30-yr. FRMs are up 24 basis points. Even rates on 5-1 hybrid ARMs are up 21 points (with new data out tomorrow).
And the news on refinancing volume isn't good. As rates rise, refi activity expectedly dries up. The Mortgage Bankers Association Refi Index is -24% from just seven weeks ago.
Maybe making new houses and home improvements out of gingerbread is a good strategy going into the future. At least we'll be able to eat them then, because we might very well have to. There won't be any income sources left to buy food.