"Home ATM" is Closing

Mortgage Equity Withdrawal (MEW) Declines in Q4

During the housing bubble, many homeowners borrowed heavily against their perceived home equity - jokingly calling it the “Home ATM” - and this contributed to the subsequent housing bust, since so many homeowners had negative equity in their homes when house prices declined. Note: Very few homeowners have negative equity now - unlike during the housing bubble.

Refinance activity declined significantly in early 2022 as mortgage rates increased, and I was expecting MEW to also decline as fewer homeowners used cash-out refinancing. However, in mid-2022, homeowners switched to using home equity loans (2nd loans) to extract equity from their homes.

The Fed noted this increase in demand for HELOCs in the October 2022 Senior Loan Officer Opinion Survey on Bank Lending Practices: “banks reported tighter standards and stronger demand for home equity lines of credit (HELOCs).” However, in the January 2023 survey, the Fed noted that “banks reported tighter standards and weaker demand for home equity lines of credit (HELOCs).” emphasis added

Since demand weakened recently for HELOCs, are refinancing activity is off sharply, MEW declined in Q4.

Quarterly Increase in Mortgage Debt

Here is the quarterly increase in mortgage debt from the Federal Reserve’s Financial Accounts of the United States - Z.1 (sometimes called the Flow of Funds report) released today. In the mid ‘00s, there was a large increase in mortgage debt associated with the housing bubble.

In Q4 2022, mortgage debt increased $155 billion, down from $210 billion in Q3, and down from the cycle peak of $258 billion in Q2 2022. Note the almost 7 years of declining mortgage debt as distressed sales (foreclosures and short sales) wiped out a significant amount of debt.

However, some of this debt is being used to increase the housing stock (purchase new homes), so this isn’t all Mortgage Equity Withdrawal (MEW).

Mortgage Debt as a Percent of GDP

The second graph shows household real estate assets and mortgage debt as a percent of GDP.  Note this graph was impacted by the sharp decline in Q2 2020 GDP.

Mortgage debt is up $1.82 trillion from the peak during the housing bubble, but, as a percent of GDP is at 47.9% - down from Q3 - and down from a peak of 73.3% of GDP during the housing bust. This means most homeowners have large equity cushions in their home, and some MEW is not a concern.

On homeowner equity, earlier today CoreLogic noted: Homeowner Equity Insights – Q4 2022

CoreLogic analysis shows U.S. homeowners with mortgages (roughly 63% of all properties*) have seen their equity increase by a total of $1 trillion since the fourth quarter of 2021, a gain of 7.3% year over year.

In the fourth quarter of 2022, the total number of mortgaged residential properties with negative equity increased by 6% from the third quarter of 2022 to  1.2 million homes, or 2.1% of all mortgaged properties. On a year-over-year basis, negative equity fell by 2% from 1.2 million homes, or 2.2% of all mortgaged properties, in the fourth quarter of 2021.

The value of real estate, as a percent of GDP, decreased in Q4 - after peaking in Q2 2022 - and is well above the average of the last 30 years.

Calculated Risk Estimate of MEW

The following data is calculated from the Fed's Flow of Funds data and the BEA supplemental data on single family structure investment. This is an aggregate number and is a combination of homeowners extracting equity - hence the name "MEW" - and normal principal payments and debt cancellation (modifications, short sales, and foreclosures).

Note: This is not Mortgage Equity Withdrawal (MEW) data from the Fed. The last MEW data from Fed economist Dr. Kennedy was for Q4 2008.

For Q4 2022, the Net Equity Extraction was $76 billion, or 1.58% of Disposable Personal Income (DPI).   This is down significantly year-over-year. During the housing bubble we saw several quarters with MEW above 8% of DPI - that didn’t happen this cycle.

This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method. MEW was negative for a number of years but has picked up again following the onset of the pandemic.

The bottom line is, the “Home ATM” is now closing with refinance activity off sharply and HELOC borrowing declining.