by Seth Sandronsky
July 26, 2003
Many Americans are involved with mortgage refinancing. Why?
There is no shortage of answers. Consider these few.
Some Americans have medical bills to pay. Others are paying college tuition.
Both costs have been climbing sharply. Unlike Americans’ disposable income, the growth of which has slowed down as a rising jobless rate chills many workers’ demands for higher wages.
Meanwhile, some Americans are beginning or expanding mom-and-pop companies.
“Mortgages remain the primary source of funding for small businesses,” according to Jane D’Arista, an economist with the Financial Markets Center.
In the recent past, low mortgage rates have combined with high home values to spur various Americans to use their residences like automated teller machines. This trend has also stimulated the economy.
For example, mortgage refinancing has created new jobs for construction laborers and loan processors. When payrolls grow, more workers buy goods and services.
But all that glitters is not golden forever. The rise in home values, a driving force in the mortgage refinance industry, has reached bubble proportions.
“In the last seven years, home prices have outpaced the overall rate of inflation by more than 30 percentage points,” notes economist Dean Baker of the Center for Economic and Policy Research. “There has never been a comparable run-up in home prices, which generally move in step with the overall inflation rate.”
Thus it is predictable that the current real estate bubble will deflate.
This means that an important source of economic stimulus connected with mortgage refinancing will weaken.
Recall that few commentators or policymakers predicted the 2001 recession or the stock market deflation. However, the contours of the faltering real estate bubble have begun emerging.
In first-quarter 2003, housing values rose at an annualized rate of 5.5 percent, according to Federal Reserve Bank data. This compares with increases of 9.4 percent in 2002, 9.6 percent in 2001 and 9.9 percent in 2000.
In 2000 and 2001, home values were over twice the amount of mortgage debt.
Between January and March 2003, annualized home values ($748 billion) were nearly the same as household mortgage debt ($723.3 billion).
The relationship between residential real estate values and mortgage debt levels is a potential problem for the American economy. In particular, businesses and consumers relying on mortgage refinancing to make ends meet are at-risk.
With a drop in real estate values, they will be able to borrow less against their homes. The results?
On one hand, they would have to turn to other sources for cash. Examples include credit cards, savings and stocks.
On the other hand, there would be a decrease in mortgage-driven spending. This would lead to economic contraction.
Increases since mid-June in mortgage rates would also suggest that the home refinancing boom may be coming to a close. Higher rates increase loan costs, reducing the number of applicants.
Costlier mortgage refinancing plus a decline in home values bodes ill for small businesses and workers. Moreover, it is unclear how financial institutions would be affected by the slowing down of the mortgage borrowing boom.
Seth Sandronsky is a member of Peace Action and co-editor with Because People Matter, Sacramento’s progressive paper. He can be reached at: email@example.com.