Monday, August 14, 2006

Debt Trap

From the Contra Costa Times:

More use homes as main asset

Instead of building a nest egg for retirement, a growing number of homeowners are putting themselves in a debt trap.

Economists and investment advisers say that more Americans are relying on their homes as their primary asset for retirement. These retirees-to-be reckon they can always tap the expanding wealth in their residence to cover their leisure years.

The reasoning goes something like this: Need some cash? No problem, just get a home-equity line of credit. And because home values have skyrocketed in recent years in places such as the East Bay, homeowners figure they can replace the equity lost from taking out the loan within a year or two. Plus, down the road, they assume they can always just sell the house or get another loan to raise some quick cash for retirement.

"People are making the mistake of thinking they live inside a big piggy bank," said Libby Mihalka, president of Altamont Capital. "They don't realize it can all snowball out of control very quickly. Their house is not an ATM."

Two new studies confirm the trend. One, by the Securities Industry Association, found that the declining savings rate in America in recent years has coincided with an increase in mortgage debt. Another study, by a San Francisco-based economist with the Federal Reserve Bank, found that the level of property-debt burden, compared with income, has risen in recent years.

"This is a form of financial insanity," said Frank Fernandez, chief economist with the Securities Industry Association. "You are digging yourselves deeper into debt using an asset that could decline in value."


Anonymous Anonymous said...

Its about people trying to live a lifestyle that they can't afford and people trying to impress others..

We aren't talking about financing necessities here, but frivolous things like designer clothes, vacations several times a year, bailouts for credit card debt due to overspending on crap..

Most people in this part of the country measure success by what they have and what they can display to others.

Hopefully people will be taught a tough lesson. There has not been a recession or downturn since 1990-1992 and many people (especially recent grads) have grown up in the 'age of the consumer' thinking that they are entitled to anything they want now.

8/14/2006 06:22:00 AM  
Anonymous Anonymous said...

Debt junkies getting squeezed.

8/14/2006 07:42:00 AM  
Anonymous Anonymous said...

Show & Tell Society about to go bust!

8/14/2006 07:43:00 AM  
Blogger grim said...

"Better to go to bed hungry than wake up in debt." – Ben Franklin

8/14/2006 08:00:00 AM  
Anonymous Anonymous said...

Invest in Canned Cat Food stocks as that's what these debtslaves will be eating as they try to keep their McMansions for years to come !

8/14/2006 10:29:00 AM  
Anonymous Anonymous said...

Fannie Mae: Almost All Q2 Refis Involved Equity Extraction
From Berson's Weekly Commentary: Almost all refinances in the second quarter of 2006 involved equity extraction.
While refinancing activity has been slipping (we estimate that the refinance share of single-family mortgage originations fell to 36 percent in the second quarter from 52 percent in the first quarter), the share is still strong given the generally rising interest rate environment. So if borrowers aren't refinancing to reduce mortgage payments, why are they refinancing? Most are refinancing to take equity out of their homes (a so-called “cash-out refinance”) and an increasing share are refinancing out of adjustable-rate mortgages into fixed-rate mortgages...

Debt addicts at it again.. The treadmill is speeding up....

8/14/2006 12:04:00 PM  
Anonymous Anonymous said...

Any one who visits here often knows my opinion on this. I think we are about to see a large wave of inventory go on the market from boomers cashing out for retirement.

Add that to the wave of ARM/IO holders having a hard time keeping up with resets, new inventory by spec builders, normal sellers, etc.

I think a chart would be a great way to show this coming inventory glut. Just have to get the time....


8/14/2006 04:43:00 PM  

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