How To Get Home

You are going to hear a lot about MEW (mortgage equity withdrawal) in the coming months. The questions are how much if any home prices might fall and how that will impact the economy. Americans, by some accounts, have been using the equity in their homes like an ATM to finance cars, vacations, and other consumer spending.

Our friends over at Calculated Risk (CR) have put together some estimates based on the available data related to MEW. Take a minute and read over the post and the related graphs. I bring this economic reality to my blog because I think it is important for everyone to think about how one views the equity in one’s home. Just because it is tax-deductible, does not mean that maxing out one’s HELOC is a great idea. Retail banks have pushed home equity lines of credit (HELOC) products for years with interest-only options and lender paid closing costs.

The HELOCs were seen as rather safe loans to the banks as they were secured by a real asset, which for the most part, has been appreciating in value for the last decade. HELOCs were easy to get, easy to use, and they came with a checkbook. If one follows the example on CR, then you can see that $171 billion was taken out in MEW in the 3rd quarter of 2005. If 66% percent of that flowed through to personal consumption expenditures, it is easy to see how home equity spending has supported the US economy the last few years.

Now I do not want to get labeled as an alarmist or appear negative, but I think it is important for home owners to become more selective about how they spend their equity. Before the era of HELOCs, principle paid towards one’s mortgage was locked up until the home was sold. Locked up can sometimes be a good thing.

It is too early too tell what will happen to home values and thus the amount of equity available to spend. Either way, protect your equity and save/spend it wisely.