Cash Out Refinancing and the Housing Crash

At the risk of damaging my standing as one of the leading proponents of the housing bubble argument, I would take issue with the assessment of a Washington Post article. The article reported that the percentage of people refinancing homes with mortgages that are larger than the original mortgage (in other words, pulling equity out of their home) hit a 16 year high in the first quarter.

The article rightly notes that people cannot use their homes as banks indefinitely, and that this process depends on continually rising house prices. This is all fair enough, but there is a key issue that is missing in this analysis. The main reasons to refinance are to save money on interest by taking advantage of lower interest rates and to pull equity out of your home by taking out a larger mortgage.

Well, mortgage interest rates are back up to levels not seen since 2002. This means that few homeowners can save money by refinancing at a lower interest rate. Those looking to do so almost certainly already refinanced at some point in the last 4 years. With this reason for refinancing disappearing (total refinancing is down by more than two-thirds from its 2003 peak), the only people who refinance are the ones who want to pull equity out of their home.

So, the refinancing story may not be evidence of the bursting bubble, but there is plenty of other evidence. Noteworthy on this list are record high vacancy rates for ownership units and the downward trend in existing home sales and mortgage applications for home purchases. The sky is still falling.

--Dean Baker

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