A False Sense of Home Equity

With so many Americans living with a false sense of security (called home equity), it's no wonder that spending has risen to an all time high. If it's not the pressure to take out a home equity loan to pay off credit card debt, there's the pressure of wanting the big kid toys like boats, cars, and oversized electronics. But what has fueled this excess spending? In part - inflated home values - in which homeowners can borrow money against their equity. The problem is, in some areas of the country, the equity in their homes is due to a temporary "bloating" of the value. This equity used to be viewed as security for the retirement years, but more and more individuals are watching their equity dwindle away while experiencing the rising debt on their home, and payments extending into their golden years. In a world where reality TV is a new form of entertainment, it's like watching a high-stakes game of "reality Monopoly".

Here's just a brief example I was able to witness in my lifetime: A home was purchased around 1970 for a price in the $40k range, and a 30-year mortgage with a monthly payment of around $80. By the mid 90's, the home was nearly paid off, but the car was getting old. The logical solution seemed to be at the time to take out a home equity loan, and buy a new car. Why not - it was becoming an increasingly popular way of obtaining the things that would otherwise not be affordable. Several years later, another new car, then an expensive sewing machine, and finally - a cruise with friends. Today - the home is valued around $300k, and the total monthly payment is in the range of $700. Not one of the more extreme examples, but a great example of the way homeowners view their home equity as a checking account - rather than a savings account.