Chart of the Week: GDP w/o Mortgage Equity Withdrawal

Calculated Risk notes that Mortgage Equity Withdrawal (MEW), was $171 Billion in
Q3 2005, out of total household mortgage
increases of $289.5 Billion dollars.

Goldman Sach’s estimates ~2/3 of MEW is flowing through
to personal consumption. Using their numbers, we can estimate the impact of
Mortgage Equity Withdrawal on GDP:

GDP w/ and w/o MEW (10 Years)

Source: Calculated Risk


Its readily apparent from the graph how crucial MEW has been
to GDP spending. If MEW falls significantly, it will be a major drag on GDP:
Expect personal consumption to slow, impacting retail. The Real Estate Complex
will also see job creation fade.

See also Northern Trust’s Paul L. Kasriel Households – Another Quarter Older And Deeper In Debt.



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  1. B commented on Dec 13

    I’m leery of that statistic but it’s a great discussion point. If it is even half true, it confirms the general malaise many Americans feel.

    I truly believe the underlying culprit for all of this is globalization. Investment at home is no longer a priority for many American businesses. Abroad is where the growth and, hence, investment is. Thus, somewhat of a jobless recovery.

    How about this as a worst case scenario. Cycles repeat. Especially longer wave cycles. In the early twentieth century, the barons of industry controlled a disproportionate amount of wealth in America. The average American lived in a fair amount of abject poverty. In addition to the industrial revolution was a labor revolution. Workers rights and labor movements gained significant strength as common people struggled to improve their lives. That movement led to the American middle class and a boom that has lasted ever since with a few rough patches. It created a consumer based economy that has been the envy of the world.

    Today, we see the business barons are again accumulating wealth at a rapid pace in America. Corporate balance sheets are awash in cash yet the middle class seems to be in limbo at best. Investment in the US is languishing in many industries. American companies and American consumers really could care less where they source anything as long as they save a buck. Be that GM bringing SUV engines in from China or the average consumer who doesn’t give a hoot where that LCD TV came from as long as he gets $50 off the $1000 price. No one really cares if any of this puts their neighbor out of work. If the misery becomes great enough, there exists a possibility of a backlash. A change in trend. A consumer who becomes empowered again refusing to be supportive of globalization. Hence, a reversion from globalization to nationalistic practices all started with a consumer movement. Seem unreal? Extreme? Impossible? It is surely a viable end result. Not anything that will develop any time soon but it happened before. Another manifestation of the labor movement was the Smoot Hawley Tariff Act.

    The more things change, the more they remain the same.

  2. B commented on Dec 13

    I just went to the blog site where this statistic is cited and that statistic appears highly erroneous to me.

    MEW cannot be calculated by such a simplistic calculation. It doesn’t take into account the increase in mortgages due to home improvements, home additions, etc. The vast majority of Americans do not move regularly, they improve their existing home. So, in this calculation MEW totally discounts this extremely large number. There are many other flaws to this simple approach but unless I am missing something, this appears to be another inaccurate statistic.

  3. Jack K. Miller commented on Dec 13


    I generally enjoy your blogs but you are pushing past the point of ridiculous. The total increase in household net worth the past 4 quarters is over $4 Trillion Dollars. So what if individuals took advantage of low interest rates to restructure their portfolios? My daughter and son-in-law did the same thing. They refinanced their home and second home and invested the funds at substantially higher rates of return.

    Subtracting out the benefit of capital gains on housing would be similar to subtracting out the capital gains on stocks and bonds. The total GNP is obviously composed of all sectors. The chart, even if the numbers were valid, has little value.

  4. Damian commented on Dec 13

    Jack – I’m interested to see what Barry has to say about the increase household net worth because I’ve been looking at that as well. However, most people are increasing the size of their mortgage, not decreasing – so while there is an increase in household net worth, most are taking the cash out. I admire your daughter and son-in-law for their more careful financial planning!

    I guess an interesting question would be the % of the $4 trillian that is based on increase in home values.

  5. andre haroche commented on Dec 13

    I may be missing a point here – but I think Barry’s post is highly relevant (assuming the data is accurate). What is different here versus ordinary cap gains on stocks/bonds etc is that real estate valuations have been at an all time high (versus personal income and as a % of GDP) and interest rates are at a multi-decade low. This isnt any ordinary cycle here. Back out even 50% of MEW to conservatively “normalize” and you still have a very different past GDP picture than meets the eye.

    By the way – lets forget this chart as a reflection of history, but rather a piece of data to extrapolate a potential future GDP scenario: should rates escalate, even modestly, and real estate continue to devalue as it is already in many markets and we have a potentially concerning picture for 06′.

    Unless I’m reading this upside down, to me this chart is pretty relevant.


  6. Barry Ritholtz commented on Dec 13

    I’m not suggesting that we totally back out Mortgage data — just compare it the recent numbers with the pre-2000 data.

    An unusually disproportionate amount of mortgage equity extraction have been driving GDP.

    When it reverts to the prior mean, it will have quite an impact on the economy . . .

  7. howard commented on Dec 13

    B/Jack: national savings is negative. What is it that you think is suporting consumption?

    Barry (and i) think that it’s borrowing and tapping home equity, and the fact that Jack’s daughter and son-in-law aren’t doing that isn’t exactly a case for another explanation….

  8. At These Levels commented on Dec 13

    Hike Reaction

    The bet continues to be that the Fed is almost done. At 4.25 percent after today’s move, how high can the Fed Funds rate go? It is easier to assume that the Fed is closer to the end than to the  beginning of the tightening. The FOMC statement was a lot sh

  9. B commented on Dec 13

    I love lively debates. If economics and economic statistics were easily interpreted, we wouldn’t be having a debate. This isn’t the law of thermodynamics which is written in stone. So, the reality is usually contained in the good ole bell curve. That means extreme notions are usually fringe and extremely low likelihoods of ever coming to fruition. So, when I see people citing the American savings rate is negative, I have to laugh. I’ve seen the calculation. It’s about as accurate as the GDP number listed above that is totally erroneous in its calculation.

    To assume the average American is a net negative saver implies we are all f’idiots. Or that the vast majority are. These are the people that run businesses, are doctors, mechanics, lawyers, investment advisors, bank tellers, janitors, etc. People that are responsible adults for the most part. People aren’t cumulatively stupid. And since Amerca is the richest country in the world by an exponential amount, I’d say the average American is quite intellectually capable. The elite would have you think to the contrary with their haughty notions but those people have their head in the clouds and are so out of touch with reality that no one actually ever listens to them.

    I could go on and on about the wealth of America and a simple sweep of money supply which shows Americans have gobs of cash and assets outside of their home. GOBS. That is technical for trillions. I could also talk about how the house is not an ATM for most but a very low form of financing to increase the value of other assets or pay for future investments such as college educations. Companies do the exact same thing and no one questions their debt when they take advantage of 50 year low interest rates to re-arrange their balance sheets or line up monies for new projects.

    Now, will the market decline into next year? Statistically, now is a time for such a possibility. But is America broke? Are all Americans idiots? I could argue a very relevant point that short term debt spikes can be viewed as future investment. And if every Tom, Dick and Harry wants to lend us money at super low rates, that it isn’t such a bad short term situation. Long term might be problematic but with tightening liquidity, that ain’t going to happen.

    Will the consumer get squeezed on ARMS, credit card minimum payment increases, increased property taxes, increased energy costs, etc? Quite possibly. Is the world coming to an end? Is Ameica going bankrupt? Are we going to Dow 5000 as many bears would say? Excuse me while I get up off the floor. I fell out of my chair laughing.

  10. nate commented on Dec 13

    i wonder what retail #s would look like without HEW?

    Where does all the HEW withdrawal go? (improvements to home, autos, education, living expenses, etc)

  11. howard commented on Dec 13

    B: nice debating tactic. Define a fact as inherently untrustworthy, define the public as inherently brilliant, define the outcome as some laughable notion that no one has advanced (america going bankrupt) and whaddya know: there is no problem.

    Still, to the debate.

    you don’t have to be an idiot to run up debt: you merely have to be an optimist. You’ll reduce other spending, you think, or it won’t matter because you’re going to get a nice bonus this year, or it’s fine because your house is going to continue to increase in value, or your spouse will go get a job, or it wouldn’t be right to deny the kids xmas gifts and we’ll work something out eventually, or you can’t afford both medicine and new shoes but you need both and so you assume that something will turn up.

    so to point out that consumers are stretched thin is not to call everyone an idiot, and perhaps you might abandon your straw person, b, and deal with the facts on the ground as we know them.

    We know, for instance, that the median household in america shops at wal-mart, and we know what wal-mart told us as soon as gas prices jumped: that people were coming to the store less often but buying more on each trip to the store, in order to save on gas. Is that an environment where consumers are flush?

    we know, for instance, that in many areas, something like 50% of mortgages in the past 12 months were ARMS with no equity in the monthly payment. Is that an environment where consumers are flush?

    we know, for instance, that credit card debt is rising, even in the face of higher interest rates and the higher monthly minimum payments. Is that an environment where consumers are flush?

    we know, for instance, that we have never seen the kind of equity extraction that is currently taking place in american home ownership, and indeed, home equity is at an alltime low. Is that an environment where consumers are flush?

    Whatever cannot be sustained will not be sustained, and current consumption cannot be sustained by the top few percentile of the income ladder when everyone below them is, one way or another, struggling. Just because you don’t like what the numbers are telling you doesn’t make the numbers wrong.

    i’m no prognosticator: as the wall street saw goes, i can tell you what’s going to happen but not when, or when something’s going to happen but not what. i think what’s going to happen is that consumers will throttle back on consumption that is afforded by equity extraction and credit card debt at some point, and will enter a period of debt paydown. You don’t appear to deny that possibility when you write “Will the consumer get squeezed on ARMS, credit card minimum payment increases, increased property taxes, increased energy costs, etc? Quite possibly.”

    so what actually is your point?

  12. B commented on Dec 13

    John Ryding, hawk and Chief Economist at Bear Stearns just now on Kudlow. Key word here is hawk. Not perma bull. “Consumer net worth is increasing. ie, They are accumulating wealth at a higher rate than debt.”

    So, what actually is your point Howard? lol.

  13. howard commented on Dec 13

    B: my point was made, rather clearly i thought, at 2:58, but i’ll repeat it for you:

    “B/Jack: national savings is negative. What is it that you think is suporting consumption?

    Barry (and i) think that it’s borrowing and tapping home equity, and the fact that Jack’s daughter and son-in-law aren’t doing that isn’t exactly a case for another explanation….”

    apparently, and i’m still trying to get your point, you think that it’s not possible for people to be taking on debt as a means of supporting consumption, because that would mean, in your charming phrase, that people were idiots. (i trust, btw, that you’re not disputing that people are taking on debt: if you are, i direct your attention here:

    instead, you seem to believe that people are taking on debt because they are beneficiaries of a wealth effect, which in no way undercuts the notion that people are borrowing and/or relying upon extraction of household equity, since that’s where the increase in net worth is primarily situated.

    anyhow, the notion that consumer net worth is increasing is prey to two problems: the first is the average/median problem, and the second is that real net worth per household isn’t growing (a good discussion of that problem can be found here:

    But let’s pretend that second problem doesn’t exist, that real net worth is imcreasing. Still, you have to liquify that net worth in some way to sustain consumption, and Barry’s point (which, again, i agree with) is that people are liquifying it by extracting home equity.

    and you don’t seem to doubt that despite this increase that i’ll stipulate, people – most people, real people, 95% of american households – could (indeed, in my estimation, are, because of the debt numbers) be squeezed.

    so when you’re done laughing, perhaps you might try again: what is your point? that you don’t believe in negative national savings? that you don’t think that people are extracting equity from their homes to sustain consumption? that increasing net worth means everyone is better off?

  14. B commented on Dec 13

    Howard, Howard, Howard,
    Isn’t it ironic that someone could disagree with you? You don’t need to repeat yourself. I clearly understand your statements. They aren’t necessarily fact but they are yours.

    I can find just as many people to support my argument as yours so if you yell louder, you don’t get to win. We gave that up after age 11.

  15. dsquared commented on Dec 14

    Two thirds of NEW going into consumption in the same year is a very high estimate. The Bank of England did hard time on this for the UK and came up with a number closer to 25% IIRC.

  16. Idaho_Spud commented on Dec 14

    Howard and B:

    I guess that’s why they call it the ‘dismal science’ eh? :)

    Interesting that wwo people can look at the same economic data and come to opposite conclusions. It’s a better discussion BTW without the ridicule.

    I side with howard on this one though. Everything is *not* hunky-dory for the US consumer. The huge mass of pre-bankrupcy law change filings surprised not only the courts, but even the lenders.

    And those were just the ones who weren’t in denial in October 05. Let’s wait and see what resetting ARMS and new payment terms on CC debt do to consumers.

  17. spencer commented on Dec 14

    I’m interested in where the daughter and son-in-law invested that gave them better returns then their house.

  18. CalculatedRisk commented on Dec 14

    B, my estimate of MEW is simple, but it is less than the Goldman Sachs number. Maybe the Goldman estimate of 2/3 of MEW flowing to consumption is too high, but Greenspan estimated close to 50% – so its probably not far off for the purposes of this discussion. The impact wouldn’t be as great at 50% (or 25%) but the graphs would still show that MEW has played a larger role in recent years in GDP growth.

    Possibly a more important statistic is the record Household Debt Service Ratio – even with low interest rates!

    Best to all.

  19. howard commented on Dec 14

    B, we are truly failing to communicate: i am asking you what is your argument? you acknowledge there is a “malaise many Americans feel.” you acknowledge that “Will the consumer get squeezed on ARMS, credit card minimum payment increases, increased property taxes, increased energy costs, etc? Quite possibly.”

    well, i agree with both of those.

    yet when we step down to looking at the american consumer, you generalize about the “gobs” of assets the consumer has (not true, which is why i point to the average/median problem); you deny that the negative savings rate in Q3 has any meaning – in fact, you consider it a phony statistic; you don’t think that equity extraction from homes is helping to support consumption.

    so what justifies the two positions i agree with? if the consumer has gobs of assets, doesn’t have a negative savings rate (i.e., isn’t taking on debt to support consumption), and isn’t extracting equity from their homes to support consumption, why do you think there is a “general malaise” and a “quite likely” chance (which i actually think is already happening) that the consumer is being squeezed?

    If you understand my statements, as you say, then you understand that i asked you, at 2:58, what do you think is supporting consumption? at 5:01 i asked what your point is, since you seem to be holding contradictory views (the consumer could be squeezed, there is a general malaise, but there is no negative savings rate and there is no equity extraction to support consumption). at 7:03 i asked you once again.

    i still haven’t seen you answer, although you seem to think that i labor under the delusion that just because i think something, it must be true. if that were the case, i wouldn’t keep asking you the same basic question. and if you think i’m yelling, you must lead a very sheltered life!

  20. Jack K. Miller commented on Dec 14


    The numbers I posted are real. They show that the consumer is not in dire straights. They show that Americans have never been so wealthy and that businesses have never been in better financial shape. I don’t think I mentioned it but this year is the first year in the history of the FDIC that not a single bank has gone bankrupt. The aggregate numbers show that the average consumer has a relatively small debt to equity ratio. If you were to do well in the stock market and make a billion dollars unrealized capital gains, you would be able to go on margin to outspend your income for the rest of your life. If you eventually spent $200,000,000 your debt to equity ratio would finally be higher than the average consumer today.

    It seems that you believe that if you repeat that savings is negative enough times that will make it so. The reality is that Americans have gotten smart about their savings. They do not put all their money in money market accounts (although, the total US money in money market accounts is over 5 Trillion, that is not the point here).

    When a person puts $1,000 into his 401-K plan, the national savings total goes up by $1,000. When a person draws out $1,000 from his 401-K, the national savings total goes down by $1,000. A person who puts $10,000 into a 401-K and leaves it there for 30 years might easily eventually withdraw $1,000,000 or more during his retirement years. When he does, he produces a total negative savings of $990,000; so what!

    A lot of other folks have enjoyed repeating that the national savings rate is negative. It makes a good headline even if not really true. Ironically, the incoming FOMC Chairman is concerned because the world is awash in excess savings. Out of fear, billions of folks have saved at above average rates since September 11, 2001.

    In regard to the support under consumer spending, total compensation is on a heck of a run. This is important to note because the business cycle is just now in the process of morphing from the consumer led recovery to the business led economic expansion. The very reason that Greenspan has jacked up rates is to head off a potential wage inflation spiral. Wages will expand rapidly in the months and years ahead just as you would expect in the second half of the economic business cycle. In a similar circumstance at the end of 1994, Greenspan arguably went too far. The switchover from consumer recovery to business expansion still occurred; 1995 to 2000 were pretty good years

    Hold onto your hat because the number of servers, routers and WiFi cards that will be purchased in the next 5 years is going to be a huge number; really huge. Businesses will buy a boat load of these but don’t count the consumer out. The history of the American consumer is one of remarkable resilience.

  21. howard commented on Dec 14

    Jack, i appreciate that you at least are clear about what you believe.

    Obviously we can argue until the cows come home about the negative savings rate: what i would say is that something just under 70% of american households own homes and something like 50% of american households own financial assets, and the average value of that ownership was (the last time i saw it discussed, which, admittedly, was a year or two ago) in the four digits. So i don’t agree with you (and, presumably, B) that the american householder is in great shape asset-wise. Instead, i think it’s pretty clear that we have a bifurcation in household assets, with a relatively modest number (again, last time i looked, which was somewhere in the past 12 months) of something like 7% of households worth $1M inclusive of primary residence.

    I would also find the “there is no negative savings rate” argument more convincing if we didn’t suddenly turn negative in Q3. The trendlines you are referencing have been in place for a while now: why should the number turn negative in Q3? And as i referenced earlier, why should WalMart, where the median household shops, have discovered such a powerful response to the increase in gas prices? After all, the average american household uses roughly 1K of gas a year, so even if gas prices are up $1/gallon (as they were compared to a year ago in the immediate aftermath of Katrina), why should something that minor, in the scheme of things, lead to such a noticeable response by walmart shoppers if households are doing so well?

    As for the aggregate numbers, if you check the link i provided at 7:03, you’ll see that real household net worth hasn’t jumped in the past 6 years (ok, i agree: 6 years ago, the stock market hadn’t yet tanked, but still, even if you go back 5 years, discount for inlation and for the increased number of households, the gain in per-household net worth on an average basis is tiny).

    As for a potential wage inflation spiral, yes, of course that is a potential, but here i’m inclined to agree with B’s very initial comment: globalization has advanced in such a way that, frankly, short of a return to protectionism, it’s hard to see how a wage inflation spiral gets started. This, of course, takes us to prognostication, not my forte, so maybe that’s not going to be the case, but as i’m forever pointing out to people, greater global equalitzation of incomes means the american householder loses relative position to the rest of the world, not that the rest of the world catches up to the american householder.

    As for being awash in excess savings, my indicator is the interest rate on TIPS. Should the world have excess savings, then that rate should never change, since the safest, most liquid market in the world is the US treasury market.

    And yet, over the past 3 months, that rate has gone from roughly 1.6 (where it had sat for quite some time) to roughly (haven’t checked in a few days) 2.1 – 2.2. That, to me, doesn’t accord with a world awash in excess savings, although i’m open to hearing other theories.

    But some of this is a term question: if you are saying, in your conclusion, that in the long run, the median household is going to be better off, sure, i agree. But in the long run, as Lord Keynes tells us, we’re all dead, and in the short run, i think that a series of indicators: the negative savings rate (which by itself after all wouldn’t be dispositive, even if you accepted it), the withdrawal of household equity, and the increase in household debt all point to where B and i are in agreement: that there’s plenty of chance (i would say 100% and it’s occuring now, but hell, i’m actually open-minded to hear that it’s not happening) that the consumer will be squeezed, regardless of the aggregates.

    After all, despite 16 quarters of expansion, jobs are not being produced at a strong rate and real incomes are falling (total compensation, of course, takes us beyond real income into fringes and bonuses and stuff that, for most american households, doesn’t translate into more disposable income with which to support consumption), and the aggregates don’t change that.

    For example, i’m a longtime shareholder of berkshire hathaway, and a couple months ago, it fell to about $80K/share, which i regarded as a buying opportunity. Now it’s close to $90K/share, and warren buffet’s net worth is, therefore, 10% bigger, which amounts to a pretty good number, but which is meaningless to the 109,999,999 households that aren’t headed by Warren Buffett.

    Similarly, when microsoft fell into the low $25 range a few weeks ago, i also thought it a buying opportunity, and now it’s trading in the $27+ range. As a result, messrs. gates, ballmer, and allen are all much wealthier, but there are 109,999,997 households where that didn’t make much difference.

    But in your aggregates, those distributional issues go away, which i don’t really think helps us analytically.

  22. Jack K. Miller commented on Dec 14


    My daughter and son-in-law still own their house. Its estimated value has increased at an annual rate of 7 to 9% since they refinanced. The after tax cost of the refinanced money is less than 3% annually. To date, they have made better than 42% return on assets this year in the stock market.

    Un-leveraged houses do not typically produce a great investment return. However, many families report that their house has been one of their best investments because they initially invested the down payment and watched the total equity grow over the years.

    By the way, most of the data I posted about consumers being well off was in a separate post on my blog. The numbers there show that consumers and businesses are generally in excellent financial health.

  23. B commented on Dec 14

    You mis-state and draw inaccurate conclusions regarding my commentary and then you go off on your data and conclusions that are your interpretation. Surely not fact. You can give it a rest. We disagree. It’s a blog. Go out and get some friends for the holidays and enjoy the cheer. lol.

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