Home Equity as a Income Tool
The LA Times reports on a growing, but highly risky, trend of using rising home values as an income source. As home values rise, homeowners are refinancing and pulling cash out of their homes.
As they happily watch their houses swell in value, Americans are changing their attitudes toward mortgage debt. Increasingly, a home is no longer a nest egg whose equity should never be touched, but a seemingly magical ATM enabling the owner to live it up or just live.
Homeowners took $59 billion in cash out of their houses in the second quarter, double the amount in the 2004 quarter and 16 times the average rate of the mid-1990s, according to data released this month by mortgage giant Freddie Mac.
People are cashing out so quickly that the term “homeowner” may soon be inaccurate. Fifty years ago, Americans owned, on average, three-quarters of their house and the lender owned the rest. These days, it’s approaching an even split.
My favorite part of the article though would have to be:
Such thriftiness has gone out of fashion. What was once considered undesirable — taking on large debt — is now seen as smart. And what used to be smart — becoming debt-free — is described as imprudent.
“If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years,” said David Lereah, chief economist of the National Association of Realtors and author of “Are You Missing the Real Estate Boom?” “It’s as if you had 500,000 dollar bills stuffed in your mattress.”
Subscribing to that link of thinking is only pushing the ‘montly payment’ life style. So why is this equity as income such a bad thing? One only needs to look to Friday’s statements by Alan Greenspan:
WALL STREET shuddered yesterday after Alan Greenspan, the United States’ central banker, warned American homebuyers that they risk a crash if they continue to drive property prices higher.
He said that the US house-price spiral had become an economic imbalance, threatening stability like the country’s trade gap or its budget deficit.
He said “history had not dealt kindly” with investors who kept ignoring risks.
Source: Times Online
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