An ATM That's Out of Money

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Feeling the Squeeze
The Woodhull family of Capitol Hill -- now the veterans of nine mortgage refinancings in nine years -- are feeling squeezed by their bills but are also reluctant to tap their home equity again at this time of softening home prices.

In the Washington area, where unemployment is below the national rate, real estate professionals are among the most affected. For example, Larry Chartienitz of Chevy Chase, the Woodhulls' realtor, said that during the housing boom he thought of paying $5,000 on a piece of jewelry for his wife's birthday or of flying off for a weekend getaway.

But after seeing his income drop by half last year, he's cutting back. For his wife's most recent birthday, he skipped the jewelry. "I wanted to reserve it in case I might need it for something else," Chartienitz, 61, said. And he's more likely to drive than fly on a weekend leisure trip.

Carlos LaCosta, 25, a Woodbridge real estate agent, said his income soared so fast during the housing boom that he bought a 19-foot 2006 Larson Senza boat for $20,800. Now, he said, his income is down enough that he's not eating out as much, doesn't shop at Hugo Boss as much, and doesn't pick up the tab as often when he's at a bar with friends.

However, many others, including some involved in housing, say they aren't feeling an acute pinch. Mark Merlino, general manager of Merlino Construction Group, was the primary contractor on the Woodhulls' multiple renovation projects during the boom. These days, Merlino said he still has "plenty of work" in the area.

In addition to boosting income in the real estate industry, the housing boom spurred consumer spending in two other ways.

First, rising wealth -- whether in stocks, real estate or other assets -- indirectly encourages people to spend more. One common rule of thumb is that a $1 increase in wealth generates 3 to 5 cents of extra spending, but some research suggests the "wealth effect" from housing is bigger over time.

And America's housing wealth skyrocketed as prices climbed earlier in this decade. According to Fed data, homeowners' equity -- the value of their homes minus mortgage debt -- grew to nearly $11 trillion at the end of last year, or double the value at the end of 1998.

The Woodhulls caught the train at just the right time. They bought their rowhouse for $254,000 in 1998, renovated and expanded it, and estimate that it's now worth more than six times that amount. Even after spending hundreds of thousands of dollars on improvements, their mortgage debt is less than half the value of the house, they estimate.

Second, the housing boom also fueled spending directly by turning homes into cash machines. As prices rose and interest rates fell, Americans extracted trillions of dollars in extra cash through home sales, mortgage refinancings and home equity loans.

Homeowners gained an average of nearly $1 trillion a year in extra spending money from 2001 through 2005 -- more than triple the rate in the previous decade -- according to a study by former Federal Reserve chairman Alan Greenspan and Fed economist James E. Kennedy. That's the "free cash," as the authors call it, left over after closing costs and other fees deducted from equity withdrawals.

Most of the money extracted during those boom years, nearly two-thirds, came from home sales, the authors found. Another 21 percent came from home equity lines of credit, while 15 percent came from mortgage refinancings.

About a third of the free cash gained during this period was used to buy other homes, they calculated. About 29 percent was used to acquire stocks and other assets. About 12 percent went to home improvements. And nearly a fourth, 23 percent, went to consumer spending, including paying credit card bills and reducing other non-mortgage debts.

The amount of free cash extracted has fallen sharply since the peak in 2005, to $217 billion in the last three months of 2006, down by almost half from a peak of nearly $400 billion in the third quarter of 2005. Analysts disagree about whether these changes will affect consumer spending.

The Woodhulls, however, have no doubt that their rising home wealth provided the fuel for extra spending. "Without the housing boom, we wouldn't have spent any of this," Paul Woodhull, 50, an independent radio show producer, said as he guided a visitor through his home, with its restored parquet floors and antique crown and ceiling moldings in the front, and the modern kitchen and sunny family room addition in the back.

The couple also pulled money out of their rowhouse to buy another rowhouse as an investment, and to buy a beach house in Delaware. Later, they refinanced the beach house to buy another one next door. They also refinanced at times to take advantage of falling interest rates, lowering their mortgage payments, which freed up more cash. Grand total: nine refinancings in nine years.

That means the Woodhulls have multiple mortgage, insurance and property tax payments for their four properties, as well as costs of upkeep and utilities. Plus, they have six children to feed, dress, educate and care for.

"Jeez, we've got all these payments every month," said Amy, 48, a radio network executive. "Now, when I look at sending my son to college in a year, I can't refinance again. Rates aren't falling. . . . I'm kind of stuck. What are my options? Sell a property into a down market? I'm really feeling quite caught -- like panicked caught."

How consumers cope with these pressures will determine whether the economy stays on keel this year. In the case of the Woodhulls, they know they could sell their home if they really needed cash. For now, though, they're planning to hunker down until the housing market picks up.

"I would love to put a deck on the roof," Paul said. "If this thing goes up in value more, maybe we'll do it."