Low interest rates enable you to handle the monthly payments on more debt -- but it doesn't make you borrow.
No, most people tend to borrow when they feel secure about their ability to repay the debt. They tend to pay down debt when they feel less secure about their circumstances. There are also those who are habitually in debt, in good times and bad. The only thing that stops them from borrowing is reaching the upper most limit in debt servicing. For the most part they are like any other kind of addict, they have to reach bottom before they really make changes.
If the urge to borrow rises as rates decline
Did not say that. For the most part, rates decline as the urge to borrow falls. This is a fundamental concept you should have down by now.
The urge to borrow on RE comes from a perception of rapidly rising house prices, coupled with loose lending standards and the increased ability to service payments. You could interpret that last element as meaning "as rates fall", but ability to service can change without rates changing at all. Rates can fall and the ability to service the debt also falls. This is typical in a deep recession.
Home Equity Extraction would have risen steadily since 1982 as mortgage rates declined.
It runs with the RE cycle and the economy. You can't withdraw equity when you are in a house where the mortgage has you underwater, it only works if the price rises above the note (or standards are really loose allowing for greater than 100% financing)! I don't know what it was like there during the early to mid nineties, but here, anyone who had bought a house after 1989 was underwater unless the had put down a significant down payment. Now almost everyone I know talks about how much equity they have already in their rapidly appreciating house as if the house is getting up in the morning ang going to work for them. They say things like, "My house made more than I did last month." Yikes.
BTW are you sure you work as a RE professional?
I'll give you a little secret I learned about it.
In a fast rising RE market, he who employees the most leverage makes the greatest return on their money ....right up to the point where RE stops rising and then they lose. There is a strong incentive to buy the most expensive property you can afford and put as little money into it as possible. There's your "equity extraction", people rolling existing RE gains into more and more expensive properties or more than one property (John K and Teresa have 8 residences). Then you have properties where the house goes from a million to 3.5 and big whoop, the owners take out a couple 100k to buy his and her Hummers.
People like me who simply stayed put are sitting on properties which have a very high percentage of equity but others who bought more expensive houses using less money down have me soundly beaten in the total amount of home equity. My houses were all cheap, so even a 300% appreciation doesn't add much in total. Even while they own a much smaller percentage of their house, they have more equity....and they've added to your parabolic rise in equity extraction while getting richer.
That said, the people who are about to get screwed when RE heads south aren't those with little or no equity, it is those who hold the notes on those properties. You may think you don't own mortgage backed securities but I think if you look they are putting them in the drinking water now. |
