Smart Borrower Blog

The True Value Of Your Home

Nov 9th, 2007 @ 6:40 AM by Alden Smith

In economic times such as we are in now, people tend to tighten their belts and attempt to ride it out.   There comes a time, however, when people, for one reason or another, need to lay their hands on money for whatever reason.   In past years, the best way to do this was to refinance and draw money out of equity to cover your needs.   We now see, with the market as it is that this is not a good alternative.

Drop In Sales, Drop In Prices

What has happened in the market is simple.   Homes are not selling, and many homes have been devalued to a point where there is no longer equity to take back out.   Typically, in a neighborhood of equal valued homes, if value drops on one, it drops on all, thus effectively wiping out any equity you might have established.

What Has Happened

From 2004 through 2006, Americans pulled about $840 billion a year out of residential real estate.   This was done via sales, home equity line of credit, and refinanced mortgages.   Home equity withdrawals financed as much as $310 billion a year in personal consumption from 2004 to 2006.   In the first half of this year, equity withdrawals were down 15 percent nationally compared with the average for the last three years, according to a working paper by James Kennedy, an economist, and Alan Greenspan, the former Federal Reserve chairman.

The Trickle Down Effect

This was inevitable.   The collapse this year of the housing boom has focused on those in danger of losing their home or facing higher monthly payments in their adjustable mortgages.   Now, a larger group of homeowners will not be able to count on rising home values to shore up their consumer needs. If you take into consideration that consumer spending accounts for about 70 percent of all economic activity, then the problem is obvious.   If people count on their home equity to meet consumer needs, and that equity disappears, then we see a huge drop in consumer spending.   Retailers, who typically make their highest income of the year during the Christmas holidays, are worried that due to this they will suffer.   This is a very real threat, especially with oil approaching $100 a barrel.   Even automakers are in a world of hurt.

The Bottom Line

What Americans need to do now is save more and spend less.   Many people will be annoyed by this, especially if they are consumer driven.   The truth is inevitable. Until the market corrects itself, we are in for a tough, rocky ride.