by Calculated Risk on 1/20/2006 10:44:00 AM

More on MEW, IBD reports:

As of the third quarter ... the home equity-piggy bank still looked bright and shiny.

Estimated gross equity extractions rose 10% from the previous quarter to a seasonally adjusted $990.6 billion, according to an update provided to Investor's Business Daily of a September Federal Reserve study on mortgage originations.

Extractions include money left over after a homeowner sells his home and pays off his mortgage, cash-out refinancings and home equity loans. It takes into account equity gains used for the down payment of a subsequent home purchase by excluding the buyer's estimated down payment.

Consumers had also dug more wealth out of their homes in the second quarter, with equity withdrawals rising 27% to an estimated $904.4 billion after falling for two prior quarters, said the Fed.

For the first nine months of last year, equity extraction totaled $2.6 trillion vs. $2.4 trillion for the same period of 2004 and over double withdrawals during all of 2000.

NOTE: This estimate of equity extraction is lower than my estimate of $289.5 Billion ($1.16 Trillion annual rate) for Q3. See GDP Growth: With and Without Mortgage Extraction). The difference is the FED's approach excludes buyer's estimated down payment for a subsequent home.

Goldman Sachs is concerned going forward:

... with sales and prices slipping at the end of 2005 and refinancing less attractive, economists have started to place bets on when the country's favorite piggy bank will finally start to crack. If and when that happens, consumers may have to cut back, slowing overall economic growth.

"We expect mortgage-equity withdrawals to decline and therefore not just stop supporting growth in spending and but actually act as a drag on spending," said Goldman Sachs economist Ed McKelvey.

That drag could happen mid-year, he said.