Does Home Equity Withdrawal Affect the Savings Rate?

A June 2006 IMF Working Paper explores the relationship of home equity withdrawal (HEW) with the personal saving rate. How is this affecting credit unions?


With the U.S. personal savings rate falling to -1.5% as of June 2006, many analysts have speculated on the extent that home equity withdrawal (HEW) has affected the index. A June 2006 IMF Working Paper, “Is Housing Wealth an ‘ATM’? The Relationship Between Household Wealth, Home Equity Withdrawal, and Saving Rates”, by Vladimir Klyuev and Paul Mills explores the relationship.

The authors argue that there have been several recent innovations that have affected the housing market.

  • Relaxed Qualification Standards— Loan qualification standards have eased recently to allow more borderline candidates to qualify for loans. Lenders now approve applications with a minimal down payment, which reduces the time necessary for potential borrowers (i.e. first-time buyers) to save for a future loan.
  • Lower Costs— Due to technology innovations, transaction and search costs for applying for a mortgage, refinancing an existing loan, or moving houses are lower than before. The authors point to advances in credit scoring given the large amount of data on pools of borrowers, broker competition, and the Internet for the lower fees.
  • More Available Credit— As credit standards have loosened, more credit has become available for any given interest rate, making it cheaper for homeowners to borrow against existing collateral.

Influence of HEW on the Saving Rate
As it has become easier for potential borrowers to qualify for a mortgage loan in the last 10 years, the growth of HEW has played a more prominent role in the decline in the savings rate. According to a 2001-2002 survey (Canner, Dynan, and Passmore, 2002) that asked homeowners to describe how they intended to use the funds from a cash-out refinancing, 45% responded that they extracted equity to a tune of $132 billion. Of those who extracted equity, 35% used the money for home improvements, 26% used it for debt repayment, 21% acquired real assets, and 16% used it for personal expenditures.

The study concluded that the change in HEW has a 20-cents-on-the-dollar negative effect on saving in the short run. The impact is less pronounced in the long run. This leads credence to the argument that changes in HEW have a “limited, short-term effect on saving,” according to the IMF Working Paper. While there is a direct correlation between changes in HEW and the direction of the saving rate, it is less evident than analysts have predicted.

Share Growth versus Home Equity Loan Growth
Is there a similar negative correlation for the credit union industry between share growth and home equity loan growth?

The graph illustrates that since June 2004 share growth has fallen to the low single-digits while home equity loan growth has jumped to the 20% range. While the two variables are not directly correlated, the growth gap indicates that homeowners are relying more heavily on withdrawing equity from their house rather than saving money in their share accounts to fund large expenditures. While the IMF Working Paper was on the broader economy, we can see similar trends in the credit union industry.

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