[lbo-talk] Goldman on MEW

[Doug Henwood]

>DAILY FINANCIAL MARKET COMMENT 08/01/03 Goldman Sachs Economics
>
>*  Today's comment builds a stylized and preliminary model that
>simulates the impact of higher 10-year note yields on consumer
>spending via the 'mortgage equity withdrawal' (MEW) channel. MEW 
>encompasses cash-out refinancing, home equity loans, and
>home equity extraction that occurs in the housing turnover
>process.
>
>*  We use our model to assess the potential impact of a 10-year
>Treasury note yield that stabilizes at 4-1/2%.  We assume that
>such an interest rate level would permanently push down
>refinancing applications another 20% from the latest weekly
>reading and reduce home price inflation to 4%.
>
>*  Under these assumptions, which we regard as conservative, our
>model implies that MEW would fall from 4% of disposable income
>over the last four quarters to 2% in 2004.
>
>*  Our best guess is that this would subtract about one
>percentage point from year-on-year consumer spending growth in
>2004, with the impact peaking at 1-1/2 percentage points in
>the third quarter.  Unless there is a large offset from other
>factors, this would likely cause the economy to slow to a
>below-trend rate once again.