Economic Misconceptions: Amercian Homes are "ATM Machines"

Am I the only person who has become tired of hearing one guest/host after another on CNBC mouth this baseless platitude- that Americans have been borrowing their rising home equity to fuel the recent years' economic expansion? So, now that mortgage lending is tight, the economy must fall into recession?


Jack Welch, Robert Reich and numerous others, including politicians and non-economists, to the contrary, Americans are not using their homes as "ATM machines."


In a post which I wrote in August, found here, I quoted frequent CNBC guest, David Malpas, in a passage from a Wall Street Journal editorial of early August of this year, wrote,

"The bearish view is that Americans live, breathe and spend their houses and mortgages. Yet the July 31 consumer confidence survey by the Conference Board jumped to 112, the highest in the six-year expansion. Data and theory show clearly that houses are not the be-all and end-all of the economy. Jobs matter more. For many, the value of future employment is much greater than their home equity. The low jobless claims and unemployment rate -- clear signs of a strong labor environment -- raise confidence and likely future wages. This outweighs changes in wealth, whether from declines in house prices or the stock market, especially for lower-income workers.

Nor has consumer spending been dependent on "cashing in" on the housing boom. The increase in mortgage equity withdrawals in 2004 and 2005 funded big net additions to household financial assets, while consumption growth remained steady. Mortgage equity withdrawals slumped throughout 2006, yet consumption growth was particularly fast in the fourth quarter of 2006 and the first quarter of 2007."

Malpas' logic and data are compelling. The income effects of continued employment of Americans drives the economy, and overshadows the presumed 'wealth effect' of falling home prices.

And, "no," Americans have not used their homes as 'ATM machines.' Home equity Withdrawals up, household financial assets up, consumption unchanged. Where's the support for the 'ATM machine' allegation? Nowhere.

So next time you hear that tired phrase about Americans borrowing on their home equity like it was an ATM machine, you'll know it's wrong. And that the speaker knows not of what s/he speaks.