Bill Dudley is the President of the Federal Reserve Bank of New York. He is a member of Janet Yellen’s inner circle. Dudley is the only Fed official not appointed by the President who gets a permanent vote on monetary policy. In a speech yesterday, Dudley seemed to endorse the idea that what the economy really needs is for more homeowners to again start using their homes as ATM machines. This was of course what boosted economic growth during the real estate bubble, but as most Americans found out (but apparently not Mr. Dudley) home-equity extraction is an unsustainable and dangerous source of spending. Here’s a sampling of President Dudley’s remarks with my emphasis added in bold:
In order to be able to assess the evolution of household finances more precisely, we worked with Equifax—a major credit bureau—to create a new database that tracks the credit files of a random sample of households over time. From this consumer credit panel data, we conclude that between 2004 and 2006, households were increasing their cash flow by over $200 billion a year by borrowing against their housing equity collateral. They supplemented that with another $185 billion through non-mortgage borrowing. So, at the height of the boom, annual consumption was being supplemented by around $400 billion in cash flow from debt, much of it collateralized by housing….
So, what’s next? When and to what extent will households again start tapping home equity to fund their consumption? Answers to these questions will determine the degree to which housing equity growth will add to income growth as a fundamental driver of consumption. We do not want to repeat the experience from the housing boom, but there are prudent ways for households to access their housing equity.
Time will tell if there is a renewed appetite, on both lenders’ and borrowers’ parts, to convert housing wealth into consumption. Perhaps, we will soon see a recovery in cash-out refinancing and in HELOC borrowing as a means for households to expand their consumption. In this case, the household saving rate will begin to decline. Or, we may need to wait longer for households to feel confident enough to extract some of their home equity, and for lenders to decide that expanding such lending is safe enough for their balance sheets. Whatever the timing, a return to a reasonable pattern of home equity extraction would be a positive development for retailers, and would provide a boost to aggregate growth. In the meantime, consumption growth will largely be determined by income growth, the trajectory of wages and the strength of the labor market.
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Jeremy Jones, CFA
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