It seems not a day goes by without some new forensic dissection from academia on how things went terribly wrong during the boom years.

The latest is from University of Chicago economists Atif Mian and Amir Sufi who provide some details on how households turned their homes into ATMs during bubble era and exacerbated the disconnect between consumption and debt.

Obtaining data from an unnamed credit bureau agency, Mian and Sufi track 100,000 homeowners living in all of the big cities across the country between 1997 through the end of 2008. They find that, on average, these households borrowed between $250 to $300 for every $1,000 in home price apprecation.

What did people do with the extra cash? Surprisingly, one thing they didn't do -- at least on the scale that's been portrayed in the media -- was trade up into new homes or investment properties.

More worrisome, these homeowners also didn't pay down credit card debts either, even as that type of debt doubled over the period. This happened even though credit cart debt carries a higher interest rate than the typical home equity loan, so in the long run consumers would have been better off doing this. In fact, Mian and Sufi find that the people most likely to tap their homes for cash were those who had the worst credit scores and the highest debt levels. And that's something which came back to haunt a number of these borrowers. Mian and Sufi find that about 20 percent of the defaults we're currently seeing are a result of people extracting too much equity out of their house during the boom years.

Not surprisingly, it appears that most of the funds were used to finance consumption -- on the order of 2.3 percent of GDP per year between 2002 and 2006, the researchers estimate. (The magnitude here is similar to what Alan Greenspan found in an earlier study in 2007.) With home prices on the decline and a new penchant for saving in the U.S., the results here highlight the slow growth we'll likely see for at least the next few years.

Mian and Sufi have written two other very nice papers on the subprime crisis, one looking at the ties between Washington and the mortgage industry, and another detailing the link between the rise of securitization and subprime lending (You can watch a great presentation of the latter paper here.)

--Zubin Jelveh

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