Home-equity fix creates bigger problem
TEXT OF INTERVIEW
Doug Krizner: This is the season of gingerbread houses.
As the Brothers Grimm fairy tale goes, nibble here, nibble there, the next thing you know, you’re dealing with that evil witch. In real life, 2007 was the year of a different sort of home-owning witch. The one that comes when you’ve nibbled away your home equity.
Marketplace’s Steve Tripoli joins us now to talk about the end of this binge. Steve, why was this such a big deal?
Steve Tripoli: Well Doug, it’s a big deal first because the numbers were so big. Americans were using home equity for a huge amount of their disposable income — hudnreds of billions of dollars worth. Now that money’s no longer there for many folks or for the eocnomy’s growth. And it’s a big deal second because with that source of cash gone, many Americans are really up against it deadwise — they’re running out of places to turn for cash.
Krizner: Give me a sense of why there was so much borrowing against home equity.
Tripoli: Well again, it’s a combination of reasons. I guess the most foolish one is that lots of folks were financing their daily consumption, like credit card bills, with home equity. That used to be considered quite unwise, and in fact it still is — unless you like paying interest for 30 years on last week’s restaurant bill or that new pair of sneakers. But there’s a more somber answer to the “why” question. Many Americans were tapping their home equity simply to keep up — they were caught in the so-called middle-class squeeze, where stagnating wages meet rising costs for housing and health care and education, and now they can’t tap their homes anymore. And it’s already showing up in rising credit card debt and deliquiencies, and also rising deliquiencies on auto and student loans.
Krizner: In the end, though, they’re going to end up owing more on their homes, right, after all this refinancing?
Tripoli: That’s right. And I should point out a very significant statistic here, Doug. We have heard over and over in recent years that homeownership is up thanks to new forms and lending, and that’s true. I mean, a record 68 percent of households own their homes right now. But that figure masks how little of their homes Americans own. At the peak back in 1990, Americans’ home equity — and that’s the paid-off part of the house — was 62 percent of the home’s value, on average. It has now dropped all the way to 50.4 percent, and it will almost certainly drop below 50 percent for the first time in 60 years of record-keeping.
Krizner: So it seems where we will end up in the final analysis is that most Americans are going to have a different relationship with their homes going forward.
Tripoli: That’s if they can keep them. You know, I spoke with Nicholas Retsinas at Harvard’s Joint Center for Housing Studies, and here’s what he sees coming for large numbers of tapped-out homeowners:
Nicholas Retsinas: There’s no question that in the year ahead, we’ll be spending a lot more attention on how we sustain homeownership, how we keep people’s homes, rather than put people in homes. It will cause us to look once again at what is the best housing policy.
Tripoli: As well as the best lending policy. So Doug, this was the year of learning — or I should say relearning — that owning a home is not riskless, and that home values can in fact drop, and that long-term borrowing to finance short-term consumption is generally not a good idea, especially in a society with low savings and a big generation heading for retirement.
You know, one little bright spot to close is that there still is a huge pile of equity in America’s homes — there’s trillions of dollars worth. But the problem there is that equity may not be there at all, or may not be easily accessible any more for the people who need it the most.
Krizner: Marketplace’s Steve Tripoli. Thanks so much.
Tripoli: You’re welcome, Doug.
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