|Even though home mortgage refinancings will slow this year consumer spending won't suffer, according to a new study by the Federal Reserve Bank of New York.
That is due mainly to home owners using money borrowed through refinancings to erase debt and accumulate cash that can be spent this year, fed economists Margaret McConnell, Richard Peach and Alex Al-Haschimi reported in the study.
"Concerns are rising that the recent surge in home equity withdrawal has left consumers in a weakened financial position that will, over time, prompt a retrenchment in spending," the Fed economists said in the report.
"However, a look at household assets and liabilities suggests that consumers have used the withdrawn funds to restructure their balance sheets and reduce their debt service burden. As a result, households may be in a better position to spend in the years ahead," they said.
The fed economists said 2003 was "the largest wave of mortgage refinancings in history."
American homeowners refinanced nearly 12 million mortgage loans last year, up from 8 million in 2002. Put another way, one in four mortgages were refinanced in 2003.
According to the Mortgage Bankers Association of America (MBA), the estimated dollar volume of mortgage financing reached $1.47 trillion in 2002 and a staggering $2.27 trillion last year.
"While the refinancing volumes will be far below the levels of 2002 and 2003, mortgage originations for purchasing homes are expected to be $1.31 trillion in 2004, $1.35 trillion in 2005, and $1.42 trillion in 2006, versus $1.27 trillion in 2003," the MBA said in a statement.
Higher interest rates will burst the refinancing bubble this year, but the fed economists believe "the evidence is strong that the aggregate household balance sheet has not been impaired by the boom in home equity withdrawal, and that the end of this boom need not lead to a significant slowdown in consumer spending."
Consumers also are handling the debt they have incurred by refinancing, the study found.
"The rapid increase in mortgage debt stemming from the accelerated pace of home equity withdrawal is not leading to a deterioration of household wealth," the economists said.
"Many analysts have expressed concern that the recent surge of home equity withdrawal has put consumers in a precarious financial position that will hinder their ability to spend once the refinancing boom comes to an end," they said.
"Consumers have chosen to finance at a moderate pace of spending with mortgage debt priced at historically low mortgage interest rates while at the same time increasing their acquisition of financial assets," the economists added.
"As a result, household net worth is increasing at about the same rate as it was before ... while aggregate household debt service burdens are declining."