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Home
Equity Wealth Still Increasing |
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The strength of the housing market
throughout the past several years has led to a record
number of people to cash in on their home equity.
The New York Times columnist, Bob Tedeschi, explains
how this trend should continue, in his July 23,
2006 article, “Cashing In on Home Equity.”
“According to Federal Home Loan Mortgage
Corporation, the government-sponsored company known
as Freddie Mac, which helps finance a large percentage
of the mortgages
in the United States each year, homeowners are
on pace this year to take $170 billion in cash out
of their home equity as they refinance
their mortgages.”
Last year, a record $244 billion was cashed out
in home equity. This year’s figure of $170
billion is still 10 times higher than it was in
1996.
“Families still have a whole
lot more home-equity
wealth than they previously had,’ said
Frank Nothaft, Freddie Mac’s chief economist,
‘and they’re tapping into it.”
“Cash-out refinancing has become so popular
because house valuations have jumped 57 percent,
on average, in the last four years, in many cases
giving homeowners hundreds of thousands of dollars
more in equity than they had when they bought.”
Tedeschi uses the example of, if someone’s
house has a $400,000 mortgage and it grows to $600,000,
that person can refinance and take out some or all
of the equity.
The surprising things about the transfer of home
equity loans is how much is being taken out and
what it is being used for.
This year, same as last year, an average of over
20 percent of refinanced loans are being taken as
cash.
“Instead of saving or investing,
some of these borrowers will spend $6 of every $10
they take out in home equity, said Raphael Bostic,
a professor of economics at the University of Southern
California. More important, he added, consumers
often spend much of the money on things like cars,
furniture, vacations and home-entertainment systems.”
“Households have really been leaning
on their home equity in an important way,’
Mr. Bostic said. ‘It’s one of the reasons
you’ve seen the general economy continue to
perform, which is good in that it’s another
way for households to smooth consumption.’”
Mr. Bostic questions the use of the money. He uses
an example that you would not want buy a car with
a thirty-year loan because the car would be long
gone while you are still paying for it. The same
situation applies for vacations, televisions, etc.
However, unless there is a drastic crash in housing
prices, taking out equity as cash should not
negatively affect consumers.
“Even
with the record volume of home-equity extraction
with refinances last year, the total amount of home
equity wealth in the country actually increased,’
said Mr. Nothaft of Freddie Mac.” |
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