Forbes article discusses potential economic effects of fading RE market and the likely attendant effects of less tapping of home equity …. what really struck me is the graph at the end — drives home the recent phenomonon of using the home as a piggy bank.
(you might have to register to see it — but it’s free – sorry)
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Last year Americans took $678 billion in cash out of their homes through home equity loans, cash-out refinancings and the like, equivalent to 6% of disposable income. This estimate, from Barclays Capital [the graph I mentioned], consists of the increase in home mortgage debt minus the outlays to build new homes and improve old ones beyond what’s required to offset depreciation and decay.
So, how quickly will home equity extraction fall? Barclays Capital chief U.S. economist, Dean Maki, an outspoken critic of home-as-ATM theorists, says: “If you buy into the notion that people spend all the money available to them, then one should see a sharp slowdown. This is the test.”
I love how people talk about “paying down debt” with a refinance of their home as though that debt magically disappeared.
What exactly do they think a cash-out refi is? It’s debt! And if you used that cash to pay off credit cards, you didn’t “pay down” that debt. You transfered it from an unsecured line of credit at xx.xx% interest to a line of credit secured by the roof you live under at x.xx% interest. That’s not paying it down. It’s shifting it sideways and stretching it out (not to mention putting a type of “deed” on your house for something that previously couldn’t touch it). If you sell your house and pay off the debt, then that extra debt is deducted directly from any appreciation you gained in your home. It still costs you.
If I borrow $20 from person A to pay my debt to person B, I’m still $20 in debt. A possibly future problem for homeowners is that those credit cards are still active! Now that we’ve used our house to finance past debt, we are fresh and ready to run up more on credit cards.
Plus, if that many people pumped that much cash into stocks and bonds, it would be painfully clear that it happened. Those markets are watched way to closely for that to not be noticed. What did happen was consumer spending. That has and will (IMHO) continue well into the future.
I would just laugh to see people having paid off their credit card debt, now having trouble servicing their monthly mortgage/home-equity-loan payments. Maybe some will take out debt on their credit card again to avoid defaulting on their house payments? Talk about a useless round-trip, haha.
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