Bloomberg has completed an analysis of recent Federal Reserve data and the results may surprise many people – home owners actually had a jump in their equity even in the depressed real estate market. The jump was created by home owners refinancing their current mortgages to lower interest rates, bring cash to the deal to pay down their mortgages and opting for a shorter life of their mortgages. The 7.3 percent gain in equity is the largest gain in more than 60 years.
There is a marked change in the attitudes of Americans in respect to their credit. During the housing bubble home owners used their homes like piggy banks and took out millions of dollars in equity to buy stuff. Now home owners want to reduce their debt and one way to do so is by reducing their mortgage. Americans watched over 23 percent of home owners fall underwater when the housing bubble burst. Many of these home owners have wound up losing their homes to foreclosure or short sales. Those who have been able to survive the housing crash are very risk averse now. Getting rid of or paying down mortgages is a goal for more and more home owners.
As with previous stimulus attempts, economists are finding that people are using extra money to pay down their debt rather than spending it. Two options with extra money are to put it into a savings account that is offering less than one percent interest or to shave years, and ultimately thousands of dollars in interest, off their mortgages. The average mortgage term has dropped from 29 years in February to 27 years in March and April.
Using extra money to pay down debt rather than spending it hurts economic growth but is good for long-term economic health because it improves household balance sheets. The fear factor is also contributing to a new view of debt by Americans. You could spend every dime on stuff, or you could reduce your debt and sleep a little better at night.
The economy is expected to grow by 2.2 percent in 2012 and 2.3 percent in 2013. This is a far cry from the 3.9 percent growth seen after previous recessions. Combining lost wages from lost jobs and shortened working hours, incomes have been dropping since 2009. Those people lucky enough to have survived are taking a much more conservative look at their economic futures. I met two people recently who lost their homes during the crash. Both want to be home owners again within the next 2 years but both told me that their next homes will be much more modest and affordable.