by Calculated Risk on 10/04/2008 08:43:00 AM

This is interesting ... from The Times: Homeowners steer clear of equity release loans

Fearful homeowners have finally called a halt to a decade-long spree of cashing-in on the value of their properties to pay for big-ticket consumer spending and paying off debt, the Bank of England revealed yesterday.

The Bank’s latest figures show that Britons have abruptly abandoned the habit of borrowing against their houses and flats through mortgage equity withdrawal, bringing to an end a decade-long era of the nation using its homes as cash machines.

Second-quarter figures for equity withdrawal showed that, rather than raising borrowed cash against their properties, homeowners injected a net £2.8 billion of new equity.
...
In practice, this means that homeowners collectively invested more capital in properties during the second quarter, either through paying down mortgages or cash payments to buy, than they raised through home loans.

The news marks a big turnaround.

The following graph shows home equity extraction in the U.S. through Q1 2008 (NSA - not seasonally adjusted) provided by Federal Reserve economist Jim Kennedy based on the mortgage system presented in "Estimates of Home Mortgage Originations, Repayments, and Debt On One-to-Four-Family Residences," Alan Greenspan and James Kennedy, Federal Reserve Board FEDS working paper no. 2005-41.

Click on graph for larger image in new window.

Just like in the UK, there was a surge of equity extraction in recent years. And just like in the UK, equity extraction has fallen off a cliff.

I've contacted Dr. Kennedy's office, but unfortunately data isn't available yet for Q2. However the US data probably looks very similar to UK data.

Here is what I wrote last year:

As homeowner equity continues to decline sharply in the coming quarters, combined with tighter lending standards, equity extraction should decline significantly and impact consumer spending.

As of Q1 homeowner equity had declined sharply, lending standards had tightened, and equity extraction had declined significantly. And now, based on the recent monthly data from the BEA on Personal Consumption Expenditures (PCE), it appears consumer spending has slowed sharply. My recent comment was: "[T]this will be the first decline in PCE since Q4 1991. This is strong evidence that the indefatigable U.S. consumer is finally throwing in the towel."

It appears that less equity extraction is finally having a significant impact on consumer spending. Of course consumer spending is also being impact by job losses and the recession.