Wednesday, February 15, 2012

Home Equity: Changing Perspectives

By Tim Dulaney, PhD

We wanted to write a quick post highlight the changing perspectives of industry experts concerning something as mundane as home equity.  The LA Times reported in August 2005 that, due to the rapid appreciation of real estate values and perceived wealth accumulation, consumers were beginning to spend more freely.  In fact, at the time it was becoming commonplace (and even suggested by experts) to cash out equity in your home to finance otherwise unobtainable, and sometimes transient, purchases (such as a dream wedding).  Paying off your mortgage was seen as a fool's errand.  From the article:
"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."
He called it "very unsophisticated."
The LA Times reported in September 2011 that
"High negative equity is holding back refinancing and sales activity and is a major impediment to the housing market recovery," CoreLogic Chief Economist Mark Fleming said in a statement. "The hardest-hit markets have improved over the last year, primarily as a result of foreclosures. But nationally, the level of mortgage debt remains high relative to home prices."
Clearly after the financial crisis and the collapse of home prices, many consumers are looking upon these days of free-spending at the advice of experts with dismay.  It is not hard to gather examples of individuals who cashed out the (temporarily high) equity in their home that now find themselves owing more on their mortgage than their home would fetch on the market.  Those "unsophisticated" individuals who decided not to use their home as an ATM are probably feeling quite sophisticated now with their (un)realized return on the home they currently own.

Hat tip to Eric Falkenstein for bringing this particular news story from our recent past to our attention.

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