HEARD ON THE STREET
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September 17, 2012, 2:40 p.m. ET
QE3 Packs Consumer-Spending Punch
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By JUSTIN LAHART
Americans still have a way to go fixing their finances. But the new mortgage-buying program the Federal Reserve announced last week could take some of the sting away.
U.S. households owe less today than they did when the financial crisis struck four years ago—a decline partly the result of a general unwillingness to take on new debt and partly because many people walked away from what they owed. In the first quarter, they had $13.4 trillion in liabilities (mostly debt), according to the most recent Fed data, down from a third-quarter 2008 peak of $14.4 trillion.
Even so, Americans' balance sheets still look out of whack, with household liabilities equal to 17.6% of assets (real estate, stocks, etc.) in the first quarter. While that is lower than the record 21.3% reached in early 2009, to get back to the 14.8% that prevailed during the 1990s would take a 16% reduction in liabilities, or a 19% increase in asset values.
One thing Fed policy makers hope their plan to spend $40 billion a month on mortgage-backed securities will do is speed up the repair work. By keeping rates on mortgages low and, with luck, increasing their availability, the housing-market recovery should gain more traction, boosting home prices. Layer in some stock-market gains, and the asset side of household balance sheets look better.
But the bigger effect of the Fed's new easing effort could be to make U.S. households' outsize debts not weigh as heavily on their spending.
Indeed, the low-interest rates that Fed policy helped engender are already giving households' spending power a significant boost. The household debt-service ratio—the share of after-tax income that is being spent on mortgage and consumer-debt payments—was 10.98% in the first quarter. That compared with a third-quarter 2007 peak of 14.08% and was the lowest level since 1994.
One reason is that many people have taken advantage of the low-rate environment to refinance their mortgages. In the first half, there was $597 billion in mortgage refinancing, according to Fannie Mae's most recent estimates. That is pretty substantial, but the pace of refinancing activity is actually half of what the historical relationship between refinancing and rates implies, according to Columbia Management economist Zach Pandl.
The biggest factor there is the many homeowners who owe too much on their homes to refinance. But things are changing on that front. Last week, CoreLogic reported that in the first half of this year, rising home prices lifted more than 1.3 million homeowners who were underwater on their mortgages above the water line.
Put that with the lower rates that may come from the Fed buying $40 billion in mortgage-backed securities a month, and there could be a significant pickup in refi activity. That would leave people with even lower monthly debt-payment obligations, and therefore more to spend elsewhere.
Absent a better job market, that extra cash won't come out of people's wallets. But if the Fed's aggressive easing program sparks hiring activity like it hopes, it will pack a consumer-spending punch that surprises investors. It might even surprise the Fed.
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