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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: ssandron@hotmail.com.