Homeowners who enjoyed record levels of home equity gains at the opportune time -- when mortgage interest rates plummeted to all-time lows -- spawned a refinancing movement that may have changed the economy.

"The current refinancing boom is interesting because it appears to represent a structural change in the economy," according to the Federal Reserve Bank Of San Francisco's latest "Economic Letter: Mortgage Refinancing".

A house typically accounts for one-third of total household wealth and nearly 70 percent of U.S. households own their homes. When the head of the household is more than 50 years old (which are typically wealthier households), the home ownership rate is more than 80 percent, according to the bank.

"...Adverse economic shocks to household wealth now could be easier to absorb since home equity can more easily be tapped in order to smooth consumption," the federal bank's letter states.

If so many households can better withstand recessions, that bodes well for the economy because consumer spending, much of it related to housing, is the real fuel that keeps the economy pumping.

Residential property investments account for only about 5 percent of the GDP, but consumer spending is nearly 70 percent of the economic index. The consumer spending category includes a lot of stuff needed in, around and for the home -- durable goods, non durable goods and services, according to the U.S. Bureau of Economic Analysis.

Durable goods, accounting for about 8 percent of the GDP is stuff that lasts three years or more and includes appliances, furniture, computers, telephones and multimedia equipment, construction materials, sporting goods, toys and hobby goods as well as cars, machinery and equipment, metals and minerals, recyclable materials, and parts.

Non durable goods, accounting for 20 percent of the GDP, is stuff that lasts less than three years and includes paper and paper products, chemicals and chemical products, drugs, textiles and textile products, apparel, footwear, groceries, farm products, petroleum and petroleum products, alcoholic beverages, books, magazines, newspapers, flowers and nursery stock, and tobacco products.

Also in the consumer spending category is the largest group, services, which accounts for 41 percent of the GDP and includes services related to a home's operation, including electricity, natural gas, telephones and other utilities, as well as services from the finance, insurance, real estate, transportation, medical and recreation industries.

Many argue that goods consumed are produced by the manufacturing industry which, for decades, has gotten credit for being a major economic linchpin. The technology sector, with a large manufacturing segment, is credited with spawning the longest economic expansion on record.

However, much of the cash used to purchase manufactured goods laden with technology has for a much longer period come directly from home equity.

Economist John Krainer and Florida State University Professor Milton Marquis, commissioned by the federal reserve bank to study the impact of refinancing, conclude that the impact of home equity wealth may have a greater, more sustained impact than previously assumed.

"Quantifying the extent of mortgage refinancing and the uses of cash-outs is difficult due to the limited amount of information on what households have done with their gains from refinancing ... U.S. homeowners saved an annual $4.7 billion in mortgage payments (net of increases in loan principal) through refinancing and $131 billion in cash-out refinancing in 2001 and early 2002. The majority of the funds raised through cash-outs was used for home improvements, consumption expenditures, and the restructuring of existing household debt," the federal reserve bank's report says.

"These developments in mortgage markets and mortgage refinancing are giving researchers a renewed interest in home ownership and housing wealth and their links to consumption over the business cycle as well," the authors concluded.

Published: October 10, 2003

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A journalist for 35-years, Broderick Perkins parlayed an old-school daily newspaper career into a digital news service offering editorial content and consulting services. Perkins' San Jose, CA-based DeadlineNews Group includes the flagship news site, DeadlineNews.Com, offering real estate, personal finance and consumer journalism, and a backshop, the Deadline Newsroom.