Country Focus: Is Home Equity Withdrawal Influencing the U.S. Saving Rate?

International Monetary Fund. External Relations Dept.
Published Date:
August 2006
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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 and global imbalances. And there are fears that a sharp rebound in the saving rate from historically low levels would contract domestic demand and possibly push the world’s largest economy into a recession. Analysts want a better understanding of what may be influencing the saving rate so that they can better forecast its future course, which will have implications for the U.S. and global economies.

Wealth effects

Personal saving declined as household wealth soared and home equity withdrawals accelerated.

Citation: 35, 15; 10.5089/9781451968507.023.A011

(percent of disposable income)

Data: Haver Analytics and IMF staff calculations.

Home equity withdrawal

Home equity withdrawal is a generic term for all forms of transactions whereby homeowners reduce the equity in their homes. Examples include refinancing an existing mortgage with a higher principal, taking out a second mortgage or a home equity loan without using the proceeds on home improvement, or selling an inherited house. In any given period, some households withdraw equity through these and other mechanisms, while others inject equity into their homes by making down payments on first-time home purchases, amortizing their mortgages, and so on. The balance of these transactions determines the aggregate level of home equity withdrawal, which can be inferred from flow-of-funds accounts. It may be either positive or negative and varies widely across countries and over time.

The withdrawn funds can also be used for a variety of purposes. Survey evidence from the United States and other countries indicates that about one-third of the funds obtained through home equity loans and mortgage refinancing is used for home improvement, which does not constitute a home equity withdrawal. About one-fourth is used to repay other debts, and one-fifth is used to acquire financial assets. Less than one-fifth is used to finance consumption. Hence, the bulk of home equity withdrawal is used to rebalance portfolios, allowing households to reduce higher-interest (and less tax-advantaged) debts and diversify their wealth holdings, while consuming only a limited proportion.

A number of changes have also made it easier for households to withdraw home equity. Liberalization of deposit and lending markets, increased competition among mortgage providers, mortgage securitization, improved credit-scoring techniques, and other innovations have dramatically reduced the cost of refinancing.

New products and marketing strategies have included nontraditional mortgages that require lower initial down payments and allow for more flexible amortization while expanding the range of eligible borrowers. The growth of home equity withdrawal has been helped particularly by the expansion of home equity loans and lines of credit, which have experienced explosive growth in the past few years, supported by the securitization of these instruments. Finally, “reverse mortgage” loans, which allow older homeowners to access home equity in retirement, have recently become more widely available. The ever-greater ease of accessing home equity and the strong buildup of equity as a result of the fast appreciation explain why home equity withdrawal has risen strongly over the past few years.

Incentives to save

Individuals save a portion of their income partly so that they do not have to reduce consumption dramatically when their income falls—for example, when they retire or are unemployed. When household wealth increases as a result of an appreciation of their assets, homeowners are more likely to feel that their stock of wealth is adequate and, accordingly, save less. They may also feel less need for a buffer if there is less uncertainty—when inflation falls, for example.

Incentives to save are also affected by interest rates, with higher rates offering greater reward in the form of higher future consumption for each unit saved today. In the long run, the Working Paper finds that the U.S. personal saving rate is negatively related to household net worth (relative to income) and positively related to the real interest rate and the inflation rate. Each extra dollar of wealth tends to reduce annual household saving by about 2 cents.

Even after accounting for rising wealth and declining interest and inflation rates, the saving rate trends down over time, possibly indicating a reduction in precautionary saving stemming from gradual financial liberalization. Home equity withdrawal is not found to affect the long-run value of the U.S. saving rate. Canada has also experienced a decline in its household saving rate since the early 1980s, apparently reflecting steady growth in the household net worth ratio, along with lower inflation and interest rates. Canadian households have, however, increased their equity in housing.

Nevertheless, changes in home equity withdrawal do help to explain short-run changes in the U.S. saving rate, as well as transient deviations of the saving rate from the value implied by its long-run determinants. A 1 percentage point increase in the ratio of home equity withdrawal to disposable income temporarily lowers the saving rate by 0.15–0.2 percentage points.

Effects on consumption and saving

Given the numerous signs that housing market activity and price appreciation are decelerating in the United States, it is useful to assess the effect of that slowdown on household consumption, which is the largest component of GDP. With smaller capital gains on real estate assets, a sharp reduction in home equity wealth can be anticipated. And for those who view home equity extraction as an indispensable source of financing for household consumption, a drying up of this source would imply a severe drop in consumption, with serious consequences for GDP growth.

Modest rebound

As the appreciation of house prices moderated in Australia and the United Kingdom, home equity withdrawals dropped considerably, but the rise in the saving rate was modest.

Citation: 35, 15; 10.5089/9781451968507.023.A011

(percent of disposable income)

Data: Haver Analytics and IMF staff.

The Working Paper, however, suggests that a reduction in home equity withdrawal would have only a small and temporary effect on consumption. Even a drop from its current 10 percent of disposable income to its long-run average of 1 percent within one year would temporarily boost the saving rate by about 1½ percentage points of disposable income. A more permanent positive effect on saving would be expected if the growth of household wealth slowed and interest rates rose. Indeed, this is the effect experienced in Australia and the United Kingdom—two countries that went through a major deceleration in house price growth (see chart above). Although home equity withdrawal dropped markedly in these episodes, the rebound in the saving rate in these countries was moderate.

Vladimir Klyuev, IMF Western Hemisphere Department, and Paul Mills, IMF International Capital Markets Department

Copies of IMF Working Paper No. 06/162, “Is Housing Wealth an ‘ATM’? The Relationship Between Household Wealth, Home Equity Withdrawal, and Saving Rates,” by Vladimir Klyuev and Paul Mills, are available for $15.00 each from IMF Publication Services. Please see page 240 for ordering details. The full text is also available on the IMF’s website (

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