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Information on mortgages, home equity loans, and consumer credit to help you use the power of financing to your advantage.
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Loans > Home Equity
The home as a bank
JOHN CUNNIFF, AP Business Analyst. Associated Press.
Copyright Associated Press
NEW YORK (AP) - Financing for the great consumer buying binge may not be a rising stock market after all, as Wall Street analysts contend, but just another home-based business.
That business, however, isn't involved in making things, such as software products, or providing services, such as bookkeeping. It's another sort of business, that of using the house as a bank.
Rather than borrowing from a regular bank, homeowners - and two-thirds of them own the house they live in - have been borrowing on their home equity to finance cars, vacations and retail purchases.
If the assumption is valid - that you can trace much of today's buying power to home-ownership - then we soon could feel an economic slowdown. Why? Because home borrowing isn't what it used to be.
The big change involves higher rates for borrowing the amassed equity in homes, and the reaction to higher rates has always been to reduce borrowing. And less borrowing equals less spending.
Yes, on houses and stocks too.
In a further reaction to higher rates, the pace of home price increases slows. That means slower equity buildup, or less money available for borrowing. And less of an inclination to borrow too.
How much borrowed money went into the purchase of stocks and mutual funds is hard to ascertain, but anecdotal evidence suggests it's at least a 10-digit number. As a result, stocks could be hurt by a relative shortage of home-equity money.
In any case, the factors that produced the home-equity boom - rising prices and low interest rates - are less favorable now than just a few months ago. It could produce reverberations.
The reasoning is still developing, but each week it has more adherents, especially as fears grow that the Federal Reserve, ever fearful of overborrowing and overspending, willraise interest rates.
As a source of consumer wealth, it is reasoned, the stock market has its limits.
Robert Kearns of investment counselor David L. Babson & Co. states the case succinctly: "An estimated 10 percent of the population holds over 80 percent of the market's shares."
Despite the healthy economy, says Lynn Franco of The Conference Board, "the average American's income continues to be allocated mostly to the necessities of life."
In short, while stocks have addedmany trillions of dollars of wealth in the decade of the '90s alone, equity in stocks is not widely enough distributed to be the main source of consumer funds.
More families have more fundsin home equity than in stocks, thanks to low interest rates and rising values. By tapping that equity, those used to a paycheck lifestyle now have money to spend.
"Mortgage refinancings impact the economy like a tax cut, increasing discretionary income and spending," says Kearns. But when refinancing becomes more difficult - well, the "tax cut"shrinks.
The thesis hasn't been demonstrated - at what other time have we hadso many people in jobs, rising home prices, a soaring stock market, miniscule inflation and low interest rates? - but it is plausible.
Regardless, it isn't likely that the bank doors will slam tight. The owners of the bank, that is, the owners of the homes, still will have a say, however diminished, in managing the finances.
End Adv AMs Friday, Aug. 13
Reproduced with permission of the copyright owner. Further reproduction or distribution is prohibited without permission.
Text Word Count 541
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