Judy Rose: More Americans cashing in their home equity
freep.com
Judy Rose: More Americans cashing in their home equity
July 6, 2001
The run-up in house prices over the past 5 years has made many home owners much richer than they were -- at least on paper. Our houses have earned money for us at the rate of 6 percent to 10 percent a year -- especially in metro Detroit.
And that's profit on the whole value of the house, not just the amount we invested as the down payment. As Alan Greenspan said recently, these past 5 years have seen an unprecedented accumulation of personal wealth in the form of home equity.
So it is a big surprise to learn that average Americans own a smaller percentage of their home -- less equity -- than they did 10 years ago.
It seems we've been pulling the profits out of our homes and spending them, says the 2001 Harvard University study called "The State of the Nation's Housing."
"Borrowing was so heavy in the 1990s," says the study, "that home equity as a share of home value dropped 10 percent, even as home prices rose sharply."
Home owners are acting more like commercial enterprises, says Barry Havemann, a prominent New Jersey mortgage analyst. Businesses minimize the cash tied up in their buildings; they keep the buildings highly leveraged.
"Apparently, home owners aren't really aware of what they're doing," Havemann says, "but that's basically what you're seeing now."
Lenders have done some clever marketing to promote taking out loans against your house, he says. "The upshot is that you treat your home more like a commodity, and you have less equity in it."
One important reason for the equity drain is that mortgages have become the only consumer loan on which interest is still a tax deduction, notes Comerica chief economist David Littmann. That tax break has skewed the way people manage money.
"Whenever you subsidize something," says Littmann, "you get more of it than would otherwise occur." The way tax incentives are structured, using mortgages as a borrowing tool "is what I would consider a rational behavior."
Some home owners tap into this equity by refinancing the whole mortgage. About half of those who refinance this way take out extra money.
But refinancing takes several weeks and $1,000 or more in fees. Many people borrowing against their equity get the revolving loan called a home equity line of credit -- known in the business as a HELOC. A HELOC is quick and has few fees. The danger is the temptation to spend up to the limit. You could quickly be carrying another $30,000 in long-term debt.
Risks and benefits
Opinions differ on what's smart. Investment counselors usually say you should keep less equity in your house and use the money for other investments. Of course, you are probably feeling smarter than they are today if you did not pull money out of your home equity last year to put into stocks.
But home owners often take out equity loans not for smart investments but for routine expenses -- appliances or a car, for example, or to pay off credit card debt.
This has created the worry that many people today may be moving toward retirement without the one big asset associated with that time: a paid-for house.
In addition, many borrowers could have too high a debt load if the economy goes seriously sour or if they are a victim of job cutbacks, says Havemann, who is CEO of the New Jersey-based mortgage publishing firm HSH Associates.
"There are a lot of us old-timers who still like to pay off the family homestead."
Help for buyers and sellers
We don't usually review the constant stream of new books on buying or selling a house here. Most of them aren't very good.
For one thing, buying a house is not nuclear science. Unless you want to be a professional sales agent, you don't need a book's worth of knowledge. So most of the books are highly padded, sometimes with obscure technical material that will intimidate you or, on the flip side, with checklists and quizzes that are insultingly transparent.
Now comes a pair of books that stand alone for being clear, complete, savvy and brief.
They are the 2001 revised editions of "The Homebuyer's Kit" and "The Homeseller's Kit" -- for $15.95 each from Chicago-based publisher Dearborn Trade. Both are large-format paperbacks by two longtime real estate journalists, Edith Lank and Dena Amoruso.
These books really do tell you virtually everything a buyer or a seller might care to know. Then, thank goodness, they stop.
Each book is broken into more than 100 small sections, all listed in the index. So there's no need to read it all at once unless that appeals to you. You can look up a subject as it becomes relevant.
In the buyer's book, for example, section headings include: "Buyers' Brokers," "Where Are the Bargains?", "Looking Over an Older Home" and "Looking at New Homes."
In the seller's book, some sections are: "If You Are Facing Foreclosure, What to Negotiate at Listing Time," "Preparing for an Open House" and "Is the Buyer Capable?"
As a small sample, here are five categories mentioned in "Where Are the Bargains?"
A house that's sloppy, but otherwise well-maintained.
Family situations of stress -- divorce, death, illness.
A house that's overimproved for its neighborhood.
A modest house on a prestigious street.
A builder's inventory home, also called a spec home, or a home at the closeout of a new community. |
