I want to share some data with you. Sometimes we find something that is just interesting in the market and I think this is one of those things. The trend of taking cash out of our homes is at an all time high but that is going to be changing and I want you to know about it.
In 1993 the total amount of equity taken out of our homes was $19.9 billion. That sounds like a lot of money doesn’t it? Well in 2000 that rose to $26.2 billion and in 2003 the number was $147.0 billion and in 2006 it is expected to be $352.1 billion when the final numbers are in. WOW!! We are using our equity in amounts (and ways) never seen before. I will share that in 2007 the forecast is that we will see decline to $254.4 billion and in 2008 Freddie Mac says it will fall even further to $128.1 billiion. This data comes from http://www.freddiemac.com/ if you want to know more you can go check it out for yourself.
The reason for the rise is that it was available to us because the appreciation and increase of the market made the money available. With the market flattening it is going to make the money less available in the future and may cause some consequences that we did not expect.
I can’t tell you what all that money was spent on but there are some trends that we see that are disturbing. Much of the debt noted above is used to pay off older, higher interest debt from credit cards, car loans, etc. That means that much of it is spent on something already used up or at least worth a lot less than the debt that was retired. The danger of this is that it releases us to spend more money we really don’t have which can make a bad problem worse.
Some of the debt was used to finance new purchases like cars, home improvements and vacations. College is another expense that is handled this way too. While none of those things are bad it may be putting you at risk financially if you aren’t cautious.
By taking out more debt on your home you are setting yourself up for some potential pain. If you get into trouble by losing your income (job changes, illness, etc.) then you will have trouble making the payments and potentially losing your home in a foreclosure. Second, in the flatter real estate market you may not be able to sell your home for enough to pay back the debt and meet the other expenses of selling your home causing you to have to bring cash to the table to sell.
I know there are lots of people out there that are in this position today and while I can help, it is painful to go through and I would love to see everyone avoid that. I guess my point is that you need to be VERY careful when you consider taking equity out of your home and make sure it is for the right reasons. Using the money to take a great vacation or buy that BIG screen tv may not be the best idea.
If you want to discuss this more or have questions, I am always available to talk. Call me at 678-318-4984 anytime and we’ll get together. jwr
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