The "Home ATM" was Closed in Q1

Mortgage Equity Withdrawal (MEW) turns negative in Q1 2023

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 both the January 2023 and April 2023 surveys, the Fed noted that “banks reported tighter standards and weaker demand for home equity lines of credit (HELOCs).” emphasis added

Since demand weakened this year for HELOCs, and refinancing activity is off sharply, MEW turned negative in Q1. Mortgage Equity Withdrawal 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).

There are few debt cancellations now, so negative MEW suggests that normal principal payments were greater than equity borrowing in Q1.

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 Q1 2023, mortgage debt increased $45 billion, down from $154 billion in Q4, 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 just 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 47.3% - down from Q4 - 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: US Home Borrowers See First Annual Home Equity Losses Since 2012 in Q1 2023, but Overall Mortgage Performance Remains Strong

In the first quarter of 2023, U.S. homeowners with a mortgage lost a small amount of equity year over year for the first time since early 2012, while national combined equity followed suit. … Despite these declines, home equity remains solid, with the number of underwater properties unchanged since the fourth quarter of 2022. …

From the first quarter of 2022 to the first quarter of 2023, the total number of homes in negative equity increased by 4% from 1.1 million homes or 2% of all mortgaged properties.  

The value of real estate, as a percent of GDP, decreased in Q1 - after peaking in Q2 2022 - but is still 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 Q1 2023, the Net Equity Extraction was minus $30 billion, or -0.60% of Disposable Personal Income (DPI).   This is down significantly year-over-year and the first negative reading since Q1 2020. There is a seasonal pattern to MEW, and Q1 is usually the weakest quarter, so it is possible we will see positive MEW this summer.

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” was closed in Q1 with both refinance activity and HELOC borrowing off sharply.