"The home is not just a financial transaction"

Louis Proyect lnp3 at SPAMpanix.com
Fri Jan 19 07:33:21 MST 2001


NY Times, January 19, 2001

Equity Shrivels as Homeowners Borrow and Buy

By LOUIS UCHITELLE

When Erica Hutchinson and her fiancé, Lynn Corbett, bought their brownstone
in the Clinton Hill section of Brooklyn for $175,000 three years ago, they
persuaded a bank to lend them $230,000. Their argument was that the value
of their new home would jump once they used the extra mortgage money to gut
the three-story building and fill it with new bathrooms, a new kitchen, new
flooring, new windows - new everything.

They were right, of course. The Corbetts, now married, say that after
several years of a flush New York economy their brownstone would easily
sell today for at least $370,000. Their bankers seem to agree. The couple
recently added a $30,000 home equity loan, using the new money to pay off
credit card bills. "The construction costs were more than we had
anticipated so we charged them," said Ms. Corbett, who is 30, like her
husband, "and we paid for our wedding with credit cards, too."

For most American families, their home is their biggest investment, and
after years of prosperity in which home prices rose substantially, family
wealth has increased as well. But like the Corbetts, millions of households
borrowed heavily against their homes, often to help support greater spending.

The borrowing has been so extensive, in fact, that homeowners, after
building up equity through much of the 1960's and 1970's, have let their
ownership shares deteriorate over the last two decades to the lowest level
on record, the Federal Reserve reports. The borrowing even accelerated in
the 1990's, helping to explain how Americans managed to easily outspend
their incomes through two long economic expansions.

Now a slowing economy catches the average household owning less of a stake
in its home than in any economic slowdown since the advent of the modern
mortgage in the 1930's. If a recession develops and people start worrying
that they have too little equity left to continue borrowing safely against
their homes, the blow to spending could turn a mild recession into a
prolonged one. That would certainly happen, economists say, if a downturn
causes home prices to fall, shrinking even more the equity stake that
households still have in their homes.

"When you make borrowing dependent on your home, then you erode the fire
wall that protects your standard of living and we are going into this
slowdown with the fire wall clearly eroded," said Nicolas Retsinas,
director of the Joint Center on Housing Studies at Harvard. NY Times,
January 19, 2001

Equity Shrivels as Homeowners Borrow and Buy

By LOUIS UCHITELLE

When Erica Hutchinson and her fiancé, Lynn Corbett, bought their brownstone
in the Clinton Hill section of Brooklyn for $175,000 three years ago, they
persuaded a bank to lend them $230,000. Their argument was that the value
of their new home would jump once they used the extra mortgage money to gut
the three-story building and fill it with new bathrooms, a new kitchen, new
flooring, new windows - new everything.

They were right, of course. The Corbetts, now married, say that after
several years of a flush New York economy their brownstone would easily
sell today for at least $370,000. Their bankers seem to agree. The couple
recently added a $30,000 home equity loan, using the new money to pay off
credit card bills. "The construction costs were more than we had
anticipated so we charged them," said Ms. Corbett, who is 30, like her
husband, "and we paid for our wedding with credit cards, too."

For most American families, their home is their biggest investment, and
after years of prosperity in which home prices rose substantially, family
wealth has increased as well. But like the Corbetts, millions of households
borrowed heavily against their homes, often to help support greater spending.

The borrowing has been so extensive, in fact, that homeowners, after
building up equity through much of the 1960's and 1970's, have let their
ownership shares deteriorate over the last two decades to the lowest level
on record, the Federal Reserve reports. The borrowing even accelerated in
the 1990's, helping to explain how Americans managed to easily outspend
their incomes through two long economic expansions.

Now a slowing economy catches the average household owning less of a stake
in its home than in any economic slowdown since the advent of the modern
mortgage in the 1930's. If a recession develops and people start worrying
that they have too little equity left to continue borrowing safely against
their homes, the blow to spending could turn a mild recession into a
prolonged one. That would certainly happen, economists say, if a downturn
causes home prices to fall, shrinking even more the equity stake that
households still have in their homes.

"When you make borrowing dependent on your home, then you erode the fire
wall that protects your standard of living and we are going into this
slowdown with the fire wall clearly eroded," said Nicolas Retsinas,
director of the Joint Center on Housing Studies at Harvard. "The home is
not just a financial transaction, it defines who you are and what kind of
community you live in. When all of a sudden you get into trouble, you can't
just rip it up like a credit card."

The average homeowning household owed lenders 46 percent of the market
value of its residence during last year's third quarter, up sharply from
about 30 percent in 1982 and 40 percent in 1991, at the start of the
current economic expansion, the Fed reports show. For a typical family with
a home worth the median market value of $144,000 late last year, that meant
their equity was $77,760 while their debt was $66,240.

That still sounds like a relatively safe cushion. But American society once
exalted a different norm - a 20 percent down payment and the balance paid
off through a 30-year fixed-rate mortgage. The Champagne toasts and
mortgage burnings that celebrated the final payment are gone today.
Instead, a growing number of Americans are approaching or entering
retirement still making hefty home payments.

Full article at: http://www.nytimes.com/2001/01/19/business/19BORR.html


Louis Proyect
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