Salient to Investors:

The wealth effect from rising house prices may no longer be as effective in spurring the US economy as homeowners increasingly pay down mortgage principal and shorten maturities. Freddie Mac said cash-in refinancings outnumbered cash-outs by more than 2-to-1 in Q4 2012.

Amir Sufi at the University of Chicago said the wealth effect is much smaller and estimates each dollar increase in housing wealth may yield as little as an extra cent in spending – versus 3-to-5-cent estimate by economists prior to the recession. Sufi said homeowners with low credit scores were most prone to pulling money out of their properties during the housing boom.

In Q1 2013, 65 percent of Americans owned their own dwelling, the lowest in almost 18 years and versus more than 69 percent in 2004.

Many homeowners cannot refinance their mortgages because banks have tightened credit conditions so much.

Rob Nunziata at FBC Mortgage is seeing few cash-out refis and more shortening of mortgage terms.

Homeowner equity was $8.2 trillion in Q4 2012, $6.2 trillion in Q1 2009 and $13.5 trillion in 2006.

The S&P/Case-Shiller index of property values in 20 cities rose 9.3 percent in February from a year earlier, the biggest year-to-year advance since May 2006.

Karl Case and Robert Shiller found that changes in housing wealth have a much bigger impact on spending than do variations in financial wealth – due to volatility of stock prices and equity holdings that are concentrated among the rich.

John Stoltzfus at Oppenheimer said Fed easy-money is helping the stock market and is very positive on equities.

David Stevens at Mortgage Bankers Assn said credit will get tighter before it gets easier as Dodd-Frank is just starting to take effect, and lenders await even more regulations before the end of 2013.

Frank Nothaft at Freddie Mac said 10 million homeowners cannot get cash out of their properties through home-equity loans because they are under water.

Neal Soss and Henry Mo at Credit Suisse found that the wealth effect from housing has fallen to just over 3 cents on the dollar from 5 cents, while the effect on consumption from rising stock prices has dropped to just over 1 cent from 1.5 cents. Soss says we need an even bigger bull market, means Fed easing for longer.

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