The 19% increase in the Case-Shiller home price index since March 2012 is widely thought to have boosted the prospects for overall household spending via the “wealth effect” transmitted by rising prices and cash out refinancing. But as Bloomberg's Joseph Brusuelas notes, claims that spending is about to snap back should be interpreted with caution.
The bifurcated nature of the overall expansion, and deep divisions within the U.S. economy due to increasing income inequality, has accelerated since the recovery began in mid-2009. There is little evidence that the bottoming out of cash out refinancing is translating into rising demand for the moribund service or non-durable retail sectors. Perhaps a lesson for Ms. Yellen here?
Homeowners with negative and near-negative equity in their homes are incapable of refinancing and this constrains overall personal consumption. Outstanding mortgage debt is down $1.7 trillion since the peak in 2008, according to the latest Federal Reserve flow of funds data; that is mostly due to foreclosures, mortgage modifications and short sales.
During the 2002-2007 U.S. housing bubble there was a strong correlation between cash out refinancing and an increase in durable goods spending. In the post-crisis economy, the gains in home values are not uniform and the resurgence in cash out refinancings is not enough to significantly power spending on goods and services.
Cash-out refinancing activity bottomed in the second quarter of 2011 when homeowners extracted $9.5 billion from their homes...
but durable spending has risen...
as non-durable has continued to slide significantly...
So it is clear that households are not using the cash from their house ATM but are levering up using other sources (cough free money car loans cough).
What the Fed wants is to juice the housing market in order to create piggybank of sorts for households to revert to their mean of spending what illusory welath they have... it's clearly not working.
The inevitable outcome of this is that the more households soak up cash from other sources, the more desperate the Fed will be to push housing higher as it is the only remaining viable source of cash out.