The Real Estate Wealth Effect

My local paper's business section had a story on the North American economy, that started with the title, "The lastest worry: A housing slump leads to economic bust".

Should you and I, the "regular" homeowner be concerned? Yes, we should. According to the stock market's favorite pundit, Fed Chairman Alan Greenspan, a downturn in the housing market could have wide-ranging and disastrous effects. Why? Because we live beyond our means. Because our economy is being driven by this debt-based money. And because we have been getting the money to live beyond our means, in part, through our homes.

There has been a flurry of refinancing, in order for us to "make use of" equity in homes. We then take that money, and we spend it. And what's the problem with that? We renovated the house. We got the big screen tv. Interest rates are low. When will we get a chance like this again! And no harm done, right? Well, remember that this is one time money. Once we take that equity out of our homes, we will have to pay it back in the form of bigger mortgages and, if interest rates keep rising, higher and higher payments.

No big deal, you say? Your house has been appreciating nicely and your job is secure? You can handle a higher payment? That's good, because interest rates are, in fact, on the rise. And your bigger mortgage is going to mean bigger dollars when it comes time to renegotiate.

Some statistics already indicate that the hot housing market is cooling. So, it might just be time to take stock. What can you do if you've already taken that equity out and might be looking at even bigger mortgage payments? Be sure to get the best deal possible when you go to negotiate your mortgage. Every percentage point (or even part point) is money in your pocket. If you do have good cash flow, consider getting your debts paid down. Tighten the belt a little. The more debt you can eliminate before you have to renegotiate your mortage, the better off you are. This can help if you do have to start paying larger home mortgage payments. Further, any pressure that you can take off your personal debt situation will put you on a more solid basis, financially.

Finally, don't make debt your fast track to what you want. Debt appears to be growing faster than our salaries. Think about it. That means we are spending more than we are making. The bubble has to burst at some point.

A good old fashioned rainy day fund was something that our grandparents did, automatically. They distrusted debt. They did things by cash. Now, I'm not advocating going backwards; I like my credit cards as much as the next person, if only for the frequent flyer miles! But some of that good common sense wouldn't hurt any of us.

Pay down your debt. You'll do yourself a favor.

Michael

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