Study Discounts Fears of Refi Effect

A slower pace of home mortgage refinancing in the U.S. probably won’t weaken consumer spending and hamper the expansion because household balance sheets are healthy, a study released Monday by the Federal Reserve Bank of New York found.

Americans refinanced almost 12 million mortgages last year, about one-quarter of the country’s total, compared with 8 million a year earlier, according to the study by Fed economists Margaret McConnell, Richard Peach and Alex Al-Haschimi.

Forecasters including Goldman, Sachs & Co. have predicted a retrenchment in U.S. consumer spending when interest rates rise and refinancing slows. The central bank’s economists disagreed, saying consumers are managing their debt well.

“The evidence is strong that the aggregate household balance sheet has not been impaired by the boom in home equity withdrawal and that the end of this boom need not lead to a significant slowdown in consumer spending,” the Fed study said.

“Higher interest rates and the return of refinancing activity to more normal levels are not likely to result in a sharp slowing in the growth of consumer spending.”

The study also noted that the savings rate in the U.S. stayed “in positive territory” during the busiest period of home equity withdrawal.

“The rapid increase in mortgage debt stemming from the accelerated pace of home equity withdrawal is not leading to deterioration of household net worth,” the study said.

“While the refinancing boom will inevitably come to an end when interest rates rise, the increase in rates will most likely be the result of faster growth of employment, incomes and spending throughout the economy.”