Tuesday, January 10, 2006

Negative Savings

The Jersey Shore is generally affluent. Moreover, there is, and always has been, even before the bubble, a certain level of conspicuous consumption that probably makes keeping up with the proverbial “Joneses” a challenge for those who care to. Even though I believe many people can afford to live comfortably in the area, I can’t help but think that some people are trying too desperately to keep up with the Joneses and have leveraged themselves too liberally with the equity in their houses. This article from the Dallas Morning News describes why drawing equity from the house makes one feel richer.

“Have the soaring home prices of the last several years made America stronger? On balance, have they improved Americans' financial security?

You'd think so. It's hard to complain when most people's biggest financial asset is rising in value year after year.

But a rise in value is not the same as a growing asset – not when you're withdrawing that increased value and spending it.

2005 was a year for the record books – record-high housing starts and home sales as the housing bubble peaked; record-high levels of consumer debt (the Federal Reserve will report the November figure today); and record-high levels of home-equity withdrawals in the form of cash-out mortgage refinancings.

Equity withdrawals haven't just burned through a key financial cushion for Americans. Studies show that the average person borrows more after running through the check from the mortgage company. Insulting debt gets added to financial injury because this easy cash makes the holder feel richer.

There was just such a wealth effect in the late 1990s, too, thanks to soaring stock prices. The sad thing is, many of those people got hurt because they watched that paper wealth rise and then fall. They didn't extract their profits. “



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