As they happily watch their houses swell in value, Americans are changing their attitudes toward mortgage debt. Increasingly, a home is no longer a nest egg whose equity should never be touched, but a seemingly magical ATM enabling the owner to live it up or just live.
Homeowners took $59 billion in cash out of their houses in the second quarter, double the amount in the 2004 quarter and 16 times the average rate of the mid-1990s, according to data released this month by mortgage giant Freddie Mac.
People are cashing out so quickly that the term "homeowner" may soon be inaccurate. Fifty years ago, Americans owned, on average, three-quarters of their house and the lender owned the rest. These days, it's approaching an even split.
This spend-now-rather-than-save-for-later phenomenon has produced undeniable benefits. Experts attribute much of the nation's economic growth to cash-out refinancings, home equity loans and other methods of tapping rising home values. And additional real estate investments financed by home equity have contributed to the rising home prices that bring owners such pleasure.
But the spending spree has a price. With the savings rate at zero, consumers' eagerness to tap home equity is only worsening their retirement outlook, financial advisors say.
If mortgage rates rise sharply or home prices fall, many homeowners could be in financial turmoil. They may be unable to service their loans, or could even find that their homes are worth less than their mortgages.
Such a prospect seems unimaginably distant to Doug Levy, a university administrator in San Francisco.
When his two-bedroom condominium rose in value by 10% -- which took nine months in the hot Bay Area real estate market -- Levy refinanced. That increased the size of his mortgage but gave him $25,000 to pay bills and take a modest skiing vacation in British Columbia. He's considering tapping his equity again if his condo continues to appreciate.
"It's like I'm sleeping in my piggy bank," said Levy, 44. "In this market, real estate is a liquid asset."
Bill and Barbara Brockmann have a different view of their house. The retired Huntington Beach couple is sitting on half a million dollars of equity, but they're ignoring it. They aren't drawing on it to buy a new car or invest in a condo in Miami.
"I don't like debt," said Bill Brockmann, 79. "I don't buy anything I can't pay for."
Such thriftiness has gone out of fashion. What was once considered undesirable -- taking on large debt -- is now seen as smart. And what used to be smart -- becoming debt-free -- is described as imprudent.
"If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years," said David Lereah, chief economist of the National Association of Realtors and author of "Are You Missing the Real Estate Boom?" "It's as if you had 500,000 dollar bills stuffed in your mattress."
He called it "very unsophisticated."
Anthony Hsieh, chief executive of LendingTree Loans, an Internet-based mortgage company, used a more disparaging term. "If you own your own home free and clear, people will often refer to you as a fool. All that money sitting there, doing nothing."
The financial services industry is doing all it can to avoid letting consumers be foolish. Ditech.com touts home loans as a way to pay off credit cards, and Morgan Stanley says they're a good way to fund education expenses. Wells Fargo suggests taking a chunk out of your house to finance "a dream wedding."
One obvious reason for the 69% rise in mortgage debt over the last five years is the exploding cost of homes, which has far outstripped wage growth. That's led many buyers to interest-only loans and skimpy down payments, both of which minimize their equity.
The proportion of buyers whose down payment was less than 5% of the purchase price rose from 30.6% in 2000 to 38.1% this year, according to a new study by SMR Research Corp.
In California, housing prices have increased so much relative to incomes that buyers must stretch all they can.
Federal guidelines recommend homeowners devote less than $30 of every $100 in pretax income to housing. But 40% of Californians exceed that, according to a new report by the Public Policy Institute of California.
That's higher than in 1990, when the previous real estate boom was cresting after several years in which housing-price rises outpaced salary gains. The figure then was 36%.
Some Californians devote much more than a third of their incomes to housing. The report estimates that about one in seven homeowners in the state are using at least half of their income to pay for their house.
Many of these are first-time home buyers, and many of them are relatively young. The report calculates that the greatest increase in homeownership rates between 2000 and 2003 came in the 30-to-34 age group. Second-highest was 25-to-29.