If you have been following the real estate market here in Southern California within the past couple of years, especially if you’re not from the area, chances are you feel that the housing market has gone bananas, to say the least. The idea of paying well over $500,000 for a small fixer-upper seems ludicrous to most outsiders (and many longtime residents), but most Angelenos seem indifferent to the multi-billion dollar feeding frenzy raging around them; they just hop on the refinancing bandwagon to siphon extra money out of their current home’s value not just for housing, but for credit cards, automobiles and various other expenses. No problem, right?
Well, many experts and industry insiders warn that this reliance on cashing-out equity and paying on time is driving thousands upon thousands of Americans toward a collision course with bankruptcy.
“The American home and refinancing is putting people into significant debt,” said Bill Cook, professor of English at the University of La Verne. “People are putting themselves very close to their income limits.”
According to Cook, many people are unwilling to adjust their lifestyles to better accommodate increased prices in necessities such as food, gasoline and utilities, as well as hikes in taxes and inflation. Consequently, these same people, lured by the siren song of rock bottom interest rates, sign up to cash out some of their home’s value to pay for their expenses, while in return paying the lender a small chunk of their earnings once a month. As a result, the mortgage business is the healthiest it has ever been.
“The last couple years have been pretty brisk,” said Richard Porter, an account executive at Colorado Federal Savings in San Dimas. He believes the super low rates and soaring property values have combined to persuade people to cash out equity not just for necessities, but also for frivolities like vacation homes, fancy cars and other luxury purchases. Ideally, though, home equity should go back into the home through additions and remodels.
But why has housing become such a popular investment vehicle in recent years? One factor that weighs in real estate’s favor is that it is a much more stable investment than stocks and bonds, said Don Kendrick, owner of Don Kendrick Real Estate in La Verne. But unlike the stock market, where companies can issue more shares or divide existing ones, real estate has a numerical limit.
“The one variable that will not grow is the amount of land,” Kendrick said.
Another factor limiting the availability of real estate is property taxes. High home values translate into large payments made to the county and the state each month, adding up to thousands of dollars a year. Many people who bought their home years ago could not afford to repurchase it today due solely to property taxes.
Naturally, home ownership prospects were considerably less bleak in years past. Porter explained that baby boomers like him were often able to receive financial help from their parents when they needed it, since the parents had managed to save significant amounts of money for a rainy day. Today’s parents, however, are far less likely to be able to afford helping their kids start out because of interferences such as car payments, house payments, credit card bills, taxes and inflation that take large bites out of a family’s savings account.
So is home ownership doomed to remain nothing more than a dream for all but the wealthiest members of Generation Y?
“The affordability gap is catching up,” said Kendrick.
As the economy gains strength, interest rates will continue creeping back up to keep the growth from spiraling out of control. Thus, mortgage and loan payments will increase, discouraging many people from relocating and causing the market to cool down.
Porter also believes an end to the insanity is in sight.
“I think it’s pretty safe to say it can’t continue,” he said.
Tom Anderson can be reached at email@example.com.