Is home equity withdrawal depleting U.S. savings?

• Author: Vladimir Klyuev/Paul Mills
• Position: IMF Western Hemisphere Department/IMF International Capital Markets Department
• Pages: 225-235

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The U.S. personal saving rate dipped into negative territory in 2005 as household wealth, and the use of innovative methods of tapping that wealth, expanded dramatically. Was a sharp rise in home equity withdrawal the driver behind the slumping saving rate? And, potentially more ominously, is a slowdown in the housing market now likely to translate into a substantial drop in consumption? A new IMF Working Paper takes a closer look at these linkages.

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Is home equity withdrawal influencing the U S. saving rate?

The decline in the U.S. personal saving rate over the past decade has coincided with considerable growth in home equity withdrawal. Many analysts suspect there is a link.

A new IMF Working Paper by Vladimir Klyuev and Paul Mills explores the factors behind the two phenomena and investigates the extent to which home equity withdrawal has driven the falling saving rate. It also explores the degree to which rising interest rates and a slowdown in the housing market may now pose risks for household saving and consumption.

The U.S. personal saving rate, on a downward trend since the mid-1980s, turned negative in 2005. Over the past decade and a half, home equity withdrawal rose from a small negative number in the early 1990s to nearly 10 percent of personal disposable income in 2005 (see chart below).

Many commentators see the increase in home equity withdrawal as a major driving force behind the falling household saving rate. Others, however, attribute the decline in saving to the rapid growth of household wealth created by strong capital gains on financial and real assets; low interest rates, which diminished the reward to saving; and financial innovations, which have reduced the cushion of precautionary savings that households need to smooth consumption over time. In the latter view, home equity withdrawal is a convenient way for households to gain greater access to their accumulated wealth to finance consumption and rebalance asset portfolios. From this perspective, withdrawal is not an independent factor pushing household saving down.

Why worry about household saving and what may be driving it? Because there's a bigger picture: the secular decline in the U.S. household saving rate has contributed substantially to the increase in the U.S. current account deficit...