Replies to post #81914 on Zeev's Turnips Patch-No Politics (ZEEV)

[Culmus]

Sam,

that is true, adjustable rate mortgages were running at less than 10% in 1998, soared to around 30% late in 1999 and then declined to around and below 15% of mortgage applications ever since about late 2000. People have been locking in low rates, that's right.

But cost savings due to lower interest payments is just one of the mentioned factors.

Others are the economic stimulus stemming from the fact that around 60% of mortgage lenders during the last 5 years have increased their mortgage by at least 5% when refinancing. Whether that was redirected into improving homes or whether it was spent outright is irrelevant, as in any case it was an outlay into the economy in face of a declining savings rate during that time. That economic stimulus should have been at least around $110bn every years since 1997 ($3.6 trillion in outstanding mortgages in 1997Q1, thereof 60% refinanced with a minimum of 5% higher in amount). That economic stimulus should have increased to around $ 140bn in 2000 and $ 150bn in 2001, probably more than that last year. This equals 1.5% of GDP.

Then the cash-out refinancings were running at $ 100bn and $140bn in 2001 and 2002 repectively, again more than 1% of GDP.

Finally research undertaken by the Fed has shown that the wealth effect of real estate price increases is about five times as large as the one due to increasing stock prices. $100 dollars in wealth increase in stocks results in about a 3 to 4% increase in household spending. Real estate wealth increases cause an increase in discretionary spending that equals about 15 to 20 percent of the wealth increase as people rightly assume these price increases to stick better than those of stocks (ggg). I don't want to speculate about the resulting amount of spending increases, but we could easily talk north of five hundred billion dollars over the last 5 years.

Once home prices just stop to increase at the rate of the last few years, that could easily take out about $200bn to $300bn in expenditures of the economy, in a year.

The mortgage interest payment is just part of the equation.

Regards,

Culmus