Interestingly, these forms of housing debt have been paid down even more aggressively than first mortgages. So, the fluctuation in the level of mortgage rates also does not explain the change in household behavior. A final factor that may be reducing the demand for home equity extraction is a change in the distribution of housing equity in the population. Even though aggregate home equity is back to pre-crisis levels, the data indicate that the growth in equity since 2012 has gone disproportionately to older, wealthier households. Presumably, these households have less demand for credit to fund their consumption plans. In contrast, those who would like to convert housing wealth into retail purchases have not yet seen their housing equity restored to its earlier levels—reflecting, in part, slower rates of mortgage balance paydown. In addition, younger and less credit-worthy households also experienced higher relative declines in homeownership rates. While some of these demand-side factors seem to be playing a role in reducing home equity extraction, there is undoubtedly a strong supply-side effect in operation as well. Our consumer credit data indicate that lenders’ adoption of minimum credit scores for mortgage lending and their considerably more rigorous underwriting standards for HELOCs have played a very important role in limiting consumers’ ability to convert home equity into new consumption.
It is an important reason why the economic recovery and expansion have been weaker than we would like, despite the efforts of the Federal Reserve to stimulate economic activity. It also matters as we look forward. The good news is that, while the current expansion is quite old in chronological terms, it is still relatively young in terms of the health of household finances. Later in my remarks, I will talk a bit about the outlook for consumer spending in 2017 and beyond. It’s worth starting off with some background in order to develop the linkage between housing wealth and retail spending. Household incomes tend to increase as individuals grow older and become more skilled in their work and better matched to their employers. This tends to continue until they approach retirement age. This means that incomes are much higher later in life than when people first enter the workforce. Ideally, households would like to be able to even out their consumption based on their lifetime incomes, raising consumption in their early adulthood years. In general, this would mean that young people would consume a relatively high share of their incomes, while older people would save more. Indeed, young people might even wish to borrow against some of their future income so that they can enjoy some of those benefits earlier in their lifetimes. However, there are limits on the ability to shift consumption to earlier in life through borrowing. One problem is that lenders don’t have a reliable way to compel repayment of such debts.