Bill McBride tracks data on mortgage equity withdrawal as a percentage of disposable income. You withdraw mortgage equity when you take out a second mortgage or refinance your existing mortgage with a larger loan (“cash-out refi,” as we call it). The graph at the link shows how from 2002-2007, the withdrawal rate was between 4 and 9 percent each quarter. Ordinarily, the number should be slightly negative, as people pay down the principal in their mortgages. We had big negative numbers in 2009-2011, “mostly because of debt cancellation per foreclosures and short sales, and some from modifications.”
Thanks to a commenter for the pointer. Some further comments:
1. From an AS-AD perspective, you can say that mortgage equity withdrawal boosted AD from 2002-2007, and then it went into reverse when the subprime crisis hit. This might be the best story for the drop in AD.
2. From a PSST perspective, you can say that a lot of consumption patterns were unsustainable, based on people spending capital gains on housing. When the capital gains leveled off and then turned into capital losses, the economy needed to find new patterns of trade, and it still has not done so.
3. Apropos of nothing, I once cursed out the guy who developed the measure of mortgage equity withdrawal. In about 1982 or so, Jim Kennedy was the forecaster for Industrial Production, and I was the forecast co-ordinator (we were both economists at the Fed). The forecast process, which was pretty much all clerical, was time-consuming and grueling. I had finally put a forecast to bed when Jim came in and said that the forecast for Industrial Production was out of synch and needed an update. He was very concerned about who might be blamed for the glitch. I shouted, “I don’t care whose bleeping fault it is!” I really lost my temper. It was just a case of my being tired, still at work long after I usually went home, and caught off balance by having my relief at being finished turned to anguish at finding that there was more work I had to do.