I feel the large percentage of cash-out refinancing used to pay off revolving credit should also have been a factor in PCE. Since the use of the credit card or loan from the TV store was most certainly consumer consumption. And the ability to quickly pay off that debt allowed the consumer to run right out and do it all over again.

I remember watching the Fed releases the last handfull of years and seeing the obvious trend of large decrease in revolving credit coupled with an increase in mortgage debt.

Napoelan, cash-out is included in the report.

Personally I think the 3% sounds like an underestimate to me of the affect of the bubble, because it only includes money taken from people who stay in the same house.

If you sell your house and buy a new one, and go from having 300K in equity to 300K in cash, that's not being included. But this is still important, because this source of bubble money has greatly decreased.

And of course there is the whole "wealth affect." Someone who used to be saving 15K of his salary a year for retirement might have begun spending the money instead because he feels so rich because of the "value" of his house was going up 30K a year.

There's no actual loan here, rather an absence of saving, but the economic effect is the same.

Also seemingly not included is someone not doing a cash-out refinance, but going from a 30-year to a interest only. There is no cash out here, but because of looser lending standards people are now no longer paying as much for the same amount of mortgage at the same interest rate.

If people DIRECTLY tapping the equity in the home via a loan, but not moving, was 3% of consumption, overall bubble equity must have been the cause of at least 6% of consumer spending.

Dork,

I was wrong, they did include the non-mortgage debt repayment in their 3% figure. Also included in it is the cash acquired through the sale of the house and used for PCE. It is an all inclusive figure.

From page 10 of the report:
"If we
include non-mortgage debt repayments (in which, as mentioned above, installment debt is
used as bridge financing for PCE, with home mortgage debt as the ultimate source of
funding), equity extraction financed an annual average of about $115 billion of PCE from
1991 to 2005, 1.7 percent of total PCE (lines 12 and 13). By this broader measure of
PCE funding, equity extraction financed 1.1 percent of PCE from 1991 to 2000 and close
to 3 percent from 2001 to 2005."

Well the BEA has 2005 PCE at 8.7459 Trillion Dollars.

BEA: News Release: Personal Income and Outlays

3% of which is $262.377 Billion. If we assume we revert back to the 1991 to 2000 level of 1.1 percent avereage equity extraction used for PCE then the 1.9% loss is $166.1721 Billion less per year.

Sebastian, in whose fevered imagination does PCE = "squandering" money?

Look, MEW is MEW. The money goes somewhere. Not all of it, clearly, goes to PCE, but some does. The attempt to figure out how much does is part of the attempt to figure out what the impacts are on GDP. Moralizing about "squandering" money is pointless here, as is posturing about having used one's own HELOC only for superior reasons.

And you don't have "available MEW." It is possible you might have some equity; how much is a question of what your home might be appraised for today. But it isn't MEW unless you can extract it, and as credit guidelines tighten--you know we've been talking about that--everyone's ability to withdraw the equity (or realize the capital gains) tends to be impaired. Do you see this point? How much equity can be extracted depends on how much lenders will lend (or buyers will buy). If I change my maximum LTV on HELOC from 100% to 90%, you did not lose equity, but you lost access to 10% of it.

When I refinanced my mortgage a few years ago I got a "piggy-back" loan in the form of a HELOC.

The 'success' of Sebastien's anecdote is based on him paying his HELOC back - fact is some do, some don't.

I also took out a HELOC a few years back when my daughter went off to an expensive east coast engineering school at the same time the economy tanked & our kitchen ceiling collapsed (did I ever tell you how wonderful it is to own a 100 y/o home?). Good thing our home was mostly paid off (CLTVs in the low 20s).

The loan officer wanted us to agree to a 15 year payback... Fine, we will have it gone in less than ten years even though my income is about half what it was prior to 2000 (did I mention manufacturing is increasingly challenging?)...

Reality is we were still able to set aside & save. My financial adviser told me he sees very few who have... Instead he sees an increasing trend of people who roll HELOC into HELOC into HELOC... Payments being made on time for the most part so that it appears they are keeping up... But at the end of each cycle the next new HELOC balance is higher than the previous starting cycle.

A saw tooth function stepping up, up, up. From what my adviser sees that is far more common than people paying down like Sebastien... or myself.

And he sees the books of lotsa mostly middle & upper-middle income families (those with net worth ex-RE of say $200K to $2.5MM). I'm sure the folks doing nothing but high-enders see a different profile.

I'd love to see real documented numbers on this issue because it will likely tell whether debt is a major problem or not.

My guess is numbers are out there but are so heavily aggregated & massaged as to mean almost nothing. We've all heard the 'family balance sheet' is doing great... primarily do to asset inflation... I'd rather see debt to income and broken down by demographics before I stop worrying. Average Bill Gates and my whole town & there are a whole lot of millionaires... I don't see Bill offering to share much with me and my neighbors though.