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Home Equity Fuels Consumer Spending, But Refinancing to Tumble in 2004

The typical owner of a median-priced home accumulated $20,000 in equity over the past two years, Lawrence Yun, senior economist for the National Association of Realtors®, said last week in a Homeownership Alliance teleconference with financial analysts.

And home owners are continuing to accrue wealth in their homes, Yun said. While home prices normally rise 1%-2% faster than the overall rate of inflation, this year they should climb about 4% faster, largely because low mortgage interest rates “have worked their magic” in qualifying buyers.

Although the impact of those low interest rates may diminish as the economic recovery intensifies, job growth should eventually “bring a new set of home buyers into the market,” Yun predicted.

Mortgage refinancings are adding an average of $110 a month to family cash flow, said Paul Merski, chief economist for the Independent Community Bankers of America.

The latest wave of refinancing peaked in May, Merski said, but it has helped free up consumer spending for “months ahead.”

Banks this year will make a record $3.2 trillion of mortgage loans, Merski said, up from $2.5 trillion last year.

Three-quarters of the mortgage lending volume during this year’s first half came from refinancings, said Frank Nothaft, chief economist for Freddie Mac, but that will slacken slightly during the year’s second half.

Fannie Mae Chief Economist David Berson predicted that mortgage rates will remain below 6% this year, but their upward direction will begin reducing refinancings.

Next year, refinancings are likely to “tumble” to $850 billion, down from an expected $2.6 trillion in 2003, Berson said.

An audio recording of the teleconference is available for 90 days following the event on July 9.

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