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As Home Equity Lines of Credit Surge, The Low-Interest Rate Trap is Set
Borrowers feel confident about the future

By Bob Stokes
Tue, 12 Mar 2013 18:00:00 ET
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The optimism that's driven the stock market to new all-time highs is also spurring more Americans to borrow against their homes. 

A Feb. 8 CNBC article quotes a spokesperson for JPMorgan Chase: "Nationally, we've seen a 31 percent increase in [home equity lines of credit] year-over-year."
 
According to a Jan. 25 Wall Street Journal story, "McGraw-Hill Federal Credit Union, which serves employees of about 120 companies in the New York area, says its home-equity balances were up 53% in 2012."
 
You might think homeowners would be cautious, given the huge deflation in home prices that began in 2006. But when optimism reigns, people tend to forget even the recent financial past.
 
On the very eve of the housing top, Robert Prechter wrote:
 
A burst in the U.S. housing bubble could have enormous repercussions in the world economy. The aggregate value of housing is far greater than that of the stock market, so fluctuations in house prices may have a much greater effect on consumer spending. Consumer spending is likely to drop when share prices decline 20% but should drop even more when house prices plunge by a similar amount. Worse, owners more frequently borrow cash against increasing home values than increasing share prices because of the perceived stability of house prices and the ability to borrow far larger amounts relative to value. As a result, borrowing against home equity as a share of disposable personal income has skyrocketed. ... Net borrowings doubled in the 2nd quarter of 2005 vs. the same quarter in 2004 and are now 16 times the average rate of the mid-’90s. This shows an enormous—and unsustainable—dependence on borrowing against homes to fuel spending and reflects a view held by some that they are sleeping inside piggy banks. The repercussions when that trend reverses could be a sight to behold.
 
The Elliott Wave Theorist, January 2006
 
Indeed, the sights included neighborhoods populated with foreclosures when the real estate trend suffered a sudden and severe reversal.
 
Americans borrowed roughly $1-trillion against their homes in the decade leading up to that reversal.
 
That dollar figure remains well above recent home equity loan levels, however, CNBC also reports that home equity loans are expected to increase in 2013 as homeowners take advantage of low rates.
 
Will a second wave of price declines in real estate come, just as most homeowners think the market has recovered from the first wave?
 



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