More use homes as main asset
contracostatimes.com
Instead of building a nest egg for retirement, a growing number of homeowners are putting themselves in a debt trap.
Economists and investment advisers say that more Americans are relying on their homes as their primary asset for retirement. These retirees-to-be reckon they can always tap the expanding wealth in their residence to cover their leisure years.
The reasoning goes something like this: Need some cash? No problem, just get a home-equity line of credit. And because home values have skyrocketed in recent years in places such as the East Bay, homeowners figure they can replace the equity lost from taking out the loan within a year or two. Plus, down the road, they assume they can always just sell the house or get another loan to raise some quick cash for retirement.
"People are making the mistake of thinking they live inside a big piggy bank," said Libby Mihalka, president of Altamont Capital. "They don't realize it can all snowball out of control very quickly. Their house is not an ATM."
Two new studies confirm the trend. One, by the Securities Industry Association, found that the declining savings rate in America in recent years has coincided with an increase in mortgage debt. Another study, by a San Francisco-based economist with the Federal Reserve Bank, found that the level of property-debt burden, compared with income, has risen in recent years.
"This is a form of financial insanity," said Frank Fernandez, chief economist with the Securities Industry Association. "You are digging yourselves deeper into debt using an asset that could decline in value."
This phenomenon extends to the East Bay. Several portfolio managers tell stories of people in Alameda County or Contra Costa County who have taken on steadily rising levels of debt in their house.
One individual, who is in his late 40s, has refinanced his primary residence seven times in six years, each time at a higher level of debt.
"He has all the latest goodies and toys," said John Valentine, president of San Ramon-based Valentine Capital Management. "He uses it for other investments. He just keeps increasing the mortgage. The debt-to-equity ratio on his house is at the maximum level."
In 1989, about 14 percent of a household's income was devoted to paying off monthly mortgage debt, according to the study by Federal Reserve Bank of San Francisco economist Mark Doms. In 2004, that had increased to about 17 percent. Doms believes that most people can handle these levels of debt.
Still, "you have a number of people who have adjustable-rate mortgages whose payments will go up and will not be able to make those payments," Doms said.
The SIA study also found that nearly half of all Americans are not saving for retirement at all. And two-thirds are not saving enough to retire adequately.
And from 2004 to 2005, a year when the American savings rate turned negative, the mortgage debt on homes increased 15 percent to reach $1.14 trillion, the SIA found.
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