Betting the house
The numbers are finally available on how Americans are cashing out the equity in their homes -- with encouragement from brokers -- to spend not on home improvements that increase their home value but other "patriotic" endeavors such as shopping and stock speculation. So much for the improving economy; in the heart of Silicon Valley and San Francisco we have dozens of friends without jobs for months if not years, or jobs that they are only taking because there's nothing else available. Many are living off the equity in their homes thru refinancing and low interest rates and our regional bubble which keeps property prices rising each quarter.
According to this WSJ story (subscription required), "Among the ways the NASD sees investors taking money out of their homes to speculate in securities are so-called 100% mortgages, interest-only mortgages and more traditional loans such as second mortgages. The NASD dubs such strategies "liquefying" home equity."
The so-called 100% mortgages aren't really what they are called because they still require the homeowner to pledge other assets such as their stock holdings...which is great as long as the stock market continues to do well or if the real estate bubble continues to increase a property's value but problematic if either the stock or the property falls in value.
In yesterday's warning, the NASD cited a recent Federal Reserve Board study that found homeowners are pulling money out of their property at greater rates than ever. From 2001 through the first half of 2002, 11% of total funds obtained from mortgage refinancings were used for stock-market and other financial investments. That is up from less than 2% during a previously studied period, through the first half of 1999.
The sums that people are pulling from their homes have jumped, too. In 2001 and 2002, the average amount used for investments was $24,000, up from "relatively small amounts" in the earlier period. The $24,000 plowed into investments topped the averages for nearly all other categories for which people used proceeds, including home improvement.