Debt & Home Equity

The U.S. personal savings rate fell to 0% in June. According to a report
from the Commerce Department this is only second time since the Great
Depression that Americans have spent as much as they earned in a month.

The US consumers accomplished this simply by tapping into their home
equity and by taking on more debt. According to a Freddie Mac report,
homeowners cashed out $59 billion in the 2nd quarter by refinancing to
a larger mortgage loan. In addition, homeowners have been borrowing
about $50 billion per quarter against their homes through home equity
loans over the past year, according to data from the Federal Reserve and
the Federal Deposit Insurance Corp.

By contrast, Americans got just $17 billion extra in their paychecks in the
2nd quarter. Other income sources grew by another $18.5 billion in the
quarter. According to the Harvard Joint Center on Housing Studies,
households reinvested some $21.6 billion back into their homes in the 2nd
quarter, about one quarter of the funds that were extracted from
refinancings and home equity loans.

Despite the steady decline in the personal savings rate from 11% two
decades ago, the net wealth of U.S. households has increased to $48.8
trillion, or 5.4 times annual income, primarily because of the increased
value of real estate and holdings of financial assets such as stocks and bonds.

The typical consumer is spending a record 13.4% of disposable income on
servicing their consumer debt, including mortgage debt. Broader financial
obligations including rent, car payments, insurance and taxes take 18.5%
of disposable incomes, down from a peak of 18.9% two years ago. Among
those who rent, financial obligations take 31 cents of every after-tax dollar.

With interest rates rising, spending will be increasingly dependent on
income in the 2nd half of the year. Freddie Mac expects the amount of
cash extracted from refinanced loans to shrink to $69 billion in 2006 from
$162 billion this year.