Source : Bloomberg News | Publish Date : 12/9/11 | Reported by John Gittelson and Kathleen M. Howley
U.S. mortgage debt, a driver of consumer spending during the real estate boom, dropped to the lowest level in almost five years in the third quarter as foreclosures wipe out home loans and housing purchases fall.
The volume of outstanding home mortgages declined to $9.88 trillion from $9.94 trillion at June 30, according to Federal Reserve data released Thursday. The reading was the lowest since the end of 2006. Mortgage volume peaked at $10.6 trillion in early 2008, the final months of a decade-long borrowing binge.
The mortgage lending that boosted spending and padded bank profits during the 2001 to 2006 surge in home prices is failing to aid the U.S. economic recovery as the worth of real estate plunges, said Doug Duncan, chief economist of mortgage-financier Fannie Mae. Outstanding home-loan volume may drop “for at least another couple of years,” he said.
“Consumers are still leveraged well above average,” Duncan said. “That has to be worked off before you’ll see a return of robust consumption.”
Plunging home values have counteracted the wealth effect that spurred people to spend money as real estate values grew. Consumers spent about $677.3 billion, or about $113 billion a year, from home-equity loans on purchases such as cars or TVs during the 2000 to 2005 real estate boom, according to a 2007 paper by former Federal Reserve Chairman Alan Greenspan and Fed economist James Kennedy. An additional $376.2 billion, or about $63 billion a year, went toward home renovations.