Bloomberg: “Falling Mortgage Debt Erodes Spending as Wealth Effect Fades”

Posted: December 8, 2011 in Economy, Far-Right

By John Gittelsohn and Kathleen M. Howley

Bloomberg, Dec 7, 2011

U.S. mortgage debt, a driver of consumer spending during the real estate boom, may be about to enter its fourth year of decline as foreclosures wipe out home loans and housing purchases fall.

The volume of outstanding home mortgages was $9.93 trillion at the end of the second quarter, the lowest since the end of 2006, according to Federal Reserve data. A Fed report today may show further declines in the third quarter, based on lending volume and home repossessions. 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, Doug Duncan, chief economist of mortgage-financier Fannie Mae (FNMA), said in a telephone interview from Washington. 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.”

Lending for mortgages to purchase homes probably will fall to $80 billion in the fourth quarter, the lowest since 1991 and one-fifth the volume of a record high in mid-2005, according to the Mortgage Bankers Association in Washington. Home prices are down 31 percent from a July 2006 peak, based on the S&P/Case-Shiller home price index of 20 U.S. cities. …



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