Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Economic Stimulus Not a Silver Bullet


Discretionary spending unlikely to surge.

While pondering whether there's going to be a second-half recovery on the basis of stimulus checks, let's first take a look at the possible repercussions of Cash-Out Refinances Lowest in Four Years.

56% of Freddie Mac-owned loans were cash-out refinances in the first quarter of 2008, the smallest percentage since Q2 in 2004, the GSE said Friday. First quarter's share compares starkly to the 77% share of refinancing posted just one quarter earlier, and underscores the new reality for most homeowners. "A tightening of mortgage underwriting standards throughout the lending industry coupled with declining home values across much of the nation has curtailed the amount of home equity cashed out by homeowners," said Frank Nothaft, Freddie Mac vice president and chief economist.

Six out seven refinances in 2006 and 2007 had a cash-out component, Nothaft said, and many borrowers increased their mortgage rates to access that cash. In contrast, during the first three months of this year, more than half of all borrowers who refinanced lowered their mortgage rate. "During the first quarter about $29 billion in home equity was cashed out through refinance of conventional loans made to prime borrowers, off from a downwardly revised $36 billion cashed out in the fourth quarter of 2007. This is about one-third of the amount cashed out in the same quarter a year earlier," said Amy Crews Cutts, Freddie Mac deputy chief economist.

Less Cash Out Refis = Less Consumption

Assuming the trend continues, and it actually has every reason to not only continue but accelerate on account of both tightening lending standards and falling home prices, there's going to be a reduced potential spending of approximately $174 billion of discretionary spending over the course of the rest of the year as compared to a year ago.

$174 billion is based on a statement from the above article that "This is about one-third of the amount cashed out in the same quarter a year earlier." $29 billion times two equals $58 billion for the first quarter. This multiplied by three gives a $174 billion potential reduction in spending due to reductions in cash out refis for the rest of the year. I was generous by assuming the reduction will not accelerate, even though I think it will.

That more than offsets any so called stimulus from the economic stimulus plan. But let's be even more generous and assume that only one-third of cash out refis typically gets spent. That reduces the reduction in spending to $58 billion, which still chews up more than half of the economic stimulus checks.

Let's now factor in Stimulus Checks Already Spent, reduced spending on account of a Fourth Consecutive Decline In Monthly Payrolls, state cutbacks from the First U.S. Sales Tax Revenue Drop in Six Years, and changing attitudes as depicted in Cool to Be Frugal.

My conclusion is there's not going to be a noticeable surge in spending in the second half of this year. Those banking on stimulus checks to carry a second-half recovery just might wish to reconsider.
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Featured Videos