A major driver of the US economy in recent years has been home equity withdrawal
– individuals tapping the equity in their homes to fuel consumption. Obviously,
total home equity rises very quickly when house prices are rising, and it falls
very quickly when home prices are falling. But here’s the thing: total home-equity
extraction was $159 billion in the second quarter of 2007, and $133
billion in the third. As Justin Fox says, that’s a
lot.
Both Fox and Calculated Risk see home equity withdrawals declining sharply
in the quarters and years to come – which would certainly seem to be intuitive.
But before I buy into that scenario completely, I’d like to know how their view
of the relationship between house prices and equity withdrawal squares with
the known facts so far. If they can convincingly explain the $133 billion figure,
then I’ll be much more likely to sign on to their forecasts.