Wednesday, January 11, 2012

How Home Refinancing Helps Boost Spending.

Interesting NY Federal Reserve paper HERE says: 
The fact that 55 percent of the investors are governmental, foreign, or long-term institutional holders suggests that each dollar of refinancing effectively translates into 44 cents of net increase in after-tax disposable income available for spending (= 0.55 x 80 percent, assuming a 20 percent marginal tax rate). If homeowners on average spend 90 percent of this additional disposable income, then each dollar of reduced mortgage payments would translate into 40 cents of additional spending. However, this estimate of 40 cents per dollar is overly conservative, because the tendency for borrowers to spend out of increases in their disposable income likely exceeds the tendency for investor households to cut back spending in response to decreases in their interest income. For example, if investor households on average spend 70 cents of every dollar of after-tax investment income, then the overall impact of a dollar reduction in a borrower’s required monthly payment would increase by 7 cents [(=0.45 x 80 percent) x (90 percent - 70 percent)]—or from 40 to 47 cents. Taken together, these calculations imply that every dollar reduction in a borrower’s monthly mortgage payment stemming from a refinancing is likely to generate close to 50 cents of additional spending—a very different outcome than the absence of any change in spending implied if refinancing were a zero-sum game
Originally created and posted on the Oregon Housing Blog

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