Wallet Watch

Via the Center for American Progress:

The end of the housing boom has cut off a key financial safety net for American families. During the past decade of low interest rates, families borrowed heavily against the value of their homes to finance their consumption and increase their purchasing power. But as the credit crisis unfolded, and as the value of Americans’ homes dropped, lenders tightened standards on all types of mortgage loans, making it harder for families to access their home equity.

With the spigot of home equity turned off, families have turned to credit cards. Between April 2006 and May 2008, inflation adjusted credit card debt rose at an annualized average monthly rate of 4.1 percent. Compare this to the period from March 2001 to March 2006, when inflation adjusted credit card debt rose at an annualized monthly rate of only 1.1 percent.

At the height of the mortgage boom in the first quarter of 2006, the difference between the total dollar amount of new mortgages and the amount of money that people spent on their homes—the new mortgage debt available—amounted to $137 billion (in 2007 dollars). This means that families cashed out $137 billion worth of equity in their homes in just one quarter. Since the mortgage market has tightened, home-equity cashouts have declined precipitously (see figure 1). By the last quarter of 2007, home equity withdrawals slowed to $40 billion (in 2007 dollars). And by the first quarter of 2008, real estate investments actually exceeded total new mortgages for the first time since the current business cycle began in March 2001.

These trends seem increasingly important nowadays: less able to access their home equity, it’s going to be very difficult for Americans to maintain their middle-class status in the face of rising prices and stagnant incomes.