The Home ATM

Much has been made of the fact that US consumers have officially stopped saving money (see graph to the left). Believe it or not 2005 and 2006 were the first two years the US had a negative savings rate since 1932 and 1933. Needless to say, economic conditions in the 30's required US consumers to tap into savings in order to get by. But, today Americans are just addicted to spending. Consumer spending makes up 2/3 of our total GPD.


The American consumer has financed this spending binge by dipping into their home equity. Check out the graph to the left courtesy of CalculatedRisk. The amount of equity pulled out of residential real estate during the boom years is staggering. Many refer to this as Mortgage Equity Withdrawals or simply MEW.

So what is going to happen when the real estate market stops rising so fast? The graph below may give us some indication.


This graph shows real GDP growth rates with and without MEW. US consumers for years have relied on their homes to support their spending habits. With more stringent lending standards and a fall in real estate prices on the horizon we should all expect that MEW and GDP will dip as a result.