It's on the House
Sunday, May 8, 2005
Gabe Klein, a 34-year-old regional vice president for Zipcar Inc. car-sharing service, is getting a lot out of his Columbia Heights row house, including cash. By refinancing the Northwest Washington property twice in the past three years, Klein has been able to take nearly $300,000 in cash out of his growing equity and plow it back into renovation projects. Those improvements have helped lift the house's appraised value to $800,000 last year -- three times what Klein paid for it three years ago with just a $10,000 down payment.
Klein still has money to burn, too, if he so desires. The last time he refinanced, he took $80,000 out of the transaction to pay for renovations and was given a $100,000 line of credit. Though Klein said he didn't really need the money, he might use it to buy an investment property. The value Klein's house has generated -- more than he has made from working in the past three years -- is changing his view of the future.
"I'm thinking I need to buy a house a year for the next 10 years and then retire," he said.
Klein is like millions of Americans whose attitudes about homeownership have been transformed by the unprecedented growth in property values and the ability to tap that value today. It used to be that a mortgage was more or less forever. Rising equity, in turn, was considered the untouchable foundation of a retirement nest egg.
But the old psychological barriers to tapping home equity have crumbled in the past 10 years, and now, especially for younger homeowners, home equity is viewed a bit like found money. A whole generation of homeowners is able to live in a way their parents never dreamed of back when homes appreciated a percent or two a year and cashing out equity meant robbing from your retirement.
"If you go in at the age of 25 and you've seen 100 percent appreciation in your property, that's going to affect the way you look at housing for the rest of your life -- even differently than your parents, who saw 1 percent appreciation per year for decades," said Doug Duncan, chief economist for the Mortgage Bankers Association.
"Certainly we're in a new world today," said David A. Lereah, senior vice president and chief economist of the National Association of Realtors and author of the book "Are You Missing the Real Estate Boom?"
But there are trade-offs in this equity free-for-all. Clearly, the economy has benefited from our more liquid approach to homeownership, as consumers have taken money from their homes and streamed into home centers, garden stores, furniture retailers, car dealers and even travel agents. And mortgage brokers say most people are spending their equity prudently: reinvesting in their own homes, buying second homes, paying off more expensive debts and the like.
But could consumers become addicted to this wealth, and forget about the inherent risks? How will people react when the real estate market changes and there just isn't as much money to play with?
Andrew Chassaing, senior financial specialist for Wachovia Bank, said he is especially concerned that some people "feel they have all this equity burning a hole in their pocket" and can't keep their hands off it. He has clients like that.
"They keep coming back for more and I know they're not renovating their house," Chassaing said. "They just spend a lot."
Even among the most conservative homeowners, though, converting equity into cash is commonplace now.