Mortgage Cash-Outs Still Show Strength

Many U.S. homeowners continue to take cash out of their homes even as mortgage rates climb and home sales slip, helping to brace the economy, economists said.

Americans who refinance their mortgages this year are expected to draw $257 billion of wealth out of their homes, according to Freddie Mac.

That’s $13 billion more than the refinancing cash-out seen in 2005 -- the hottest year of the recent housing boom.

“I would have thought the home-equity extractions would have been much weaker now,” said Frank Nothaft, chief economist for the mortgage finance giant.

Consumers’ spending of cash extracted from rapidly rising home values has helped fuel the U.S. economy’s expansion over the last few years. But the housing sector is cooling, and most analysts expect that support to consumption to falter.

With existing home sales down 7% in the second quarter nationally and mortgage rates climbing, some economists see the ongoing refinancing spree as the once-hot housing sector’s last gift to the country’s economy.

“That [money] is going right back into the economy in one fashion or another,” Nothaft said. “Either it shows up through [home] alterations or shows up in consumption spending.”

It is hard to tell exactly where refinancing cash is going, so gauging the effect of refinance spending is “pretty murky,” said Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies.

Still, he said, “all economists would agree that refinancing home equity loans has boosted spending.”

Nothaft said many homeowners were refinancing before their adjustable-rate mortgages reset to a higher level. Those same people probably saw the value of their homes jump in recent years.

Homeowners who are inclined to refinance and have stored-up equity make up a big share of the mortgage cash-outs, he said.

Still, Nothaft said, the refinancing cash-out spree is probably nearing an end.

Freddie Mac expects homeowners to extract $152 billion out of their homes in 2007 and $108 billion in 2008.

Those numbers are still much higher than a decade ago. In 1996, refinancing cash-outs were $17 billion.

Part of the increase is due to a changing view of home mortgages, Retsinas said.

“One of the big changes is that people look at their home as a financial asset,” he said. “In another generation, the notion was ‘Burn the mortgage.’ That phrase is not in fashion anymore.”

That new attitude has some benefits for the economy, he said, and cash-outs “are keeping a floor on consumer spending.”