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.
"I think what's happening is that a lot of younger renters feel the ship is passing them by," said Hans P. Johnson, one of the authors of the report, titled "California's Newest Homeowners: Affording the Unaffordable." "If they don't buy a house now, they think, they never will."
If their incomes expand as they age, these new homeowners may pay down their mortgage debt. On the other hand, they might devote their additional spending power to toys, trips and other fun things, carrying their indebtedness forever.
For Levy, the university administrator, cashing in so quickly made sense. He bought his condo in expensive Marin County, north of San Francisco, for $510,000 in April 2004. The bank offered to finance the whole thing, but he decided to be a little conservative and put 5% down.
By January, the condo was worth $555,000, and Levy refinanced. He took out $25,000 in cash, less than the bank offered to give him. The money paid off what he describes as "really ugly" credit card debt.
The interest rate on the credit card had been more than double the rate on his mortgage, so he saved about $600 a month. Furthermore, his mortgage interest is tax-deductible; his credit card interest was not.
"It used to be that all debt was created equal and all debt was evil," Levy said. "But the tax breaks alone make a pretty compelling case to use home equity to finance just about everything."
He still has law school debts. He's tempted to dip in to his condo again -- especially considering it is now worth about $600,000.
"There is no longer an incentive to paying off your mortgage," said Levy. "The only way I'll ever pay mine off is if I win the lottery."
That's probably the only way he'll ever be able to stop working, too. "I'm never going to be able to retire, because I'll never have enough money in the bank."
The temptation to add debt can be overwhelming. Between 1997 and 2003, the percentage of people who owned their own homes outright, without any mortgage debt, declined from 38.9% to 34.6%, according to Census figures.
"Why can't people stay on diets? Because once you get down to a certain level, you start feeling good, and then you splurge," said Richard Targett, a research analyst with Ernst & Young. "So when your home goes up in value, you take that cruise. You figure, I got money in my house, I didn't earn it, let me spend some."
But he warned that if home prices stopped their rapid ascent -- which might be happening this summer -- Doug Levy won't be the only one who has to have a job for the rest of his life.
"If you're not working, where would you get the two grand you need every month for your mortgage?" Targett said. "We're living longer, retiring younger, and don't want to give up our lifestyles. Something's got to give."
The old way had much less built-in risk.
For the Brockmanns and many others who bought their homes in the two decades after World War II, a mortgage was something that started off big and slowly shrank. Just as retirement loomed, it dwindled to nothing. Making that last payment was a welcome milestone for those who knew they now had to live without a weekly paycheck.
This too is changing. In 1997, the median length of time remaining on an older homeowner's mortgage was a decade, according to Census figures. By 2003, the median was 14 years. During that time, the number of older homeowners who owed more than $300,000 on their home went up tenfold.
New products give homeowners increasing leeway as to how much equity they can tap and how fast they can tap it. Credit cards that allow consumers to draw on their home equity loans are one such device.
CMG Financial Services, a mortgage company in San Ramon, Calif., introduced another tool this summer: a combination checking account and mortgage.
It works like this: Your paycheck is deposited into your account and immediately applied to your mortgage principal. Over the course of the month, as you spend money on food, gas and other necessities, the principal creeps back up. But the result is that your mortgage debt gets paid off more quickly.
That's the theory, at least. Of course, if you're indulgent, you can pay much less of your mortgage -- like none. Any shortfall is added on to the principal.
"This loan gives you a lot of power," said CMG's vice president of marketing, Doug Nesbit. "You can use it, you can abuse it."
In the old days, retirees who were house-rich and cash-poor generally downsized, perhaps moving in with their kids or retiring to the Sunbelt. To help consumers avoid those fates, reverse mortgages have been developed, which allow them to drain the equity from their houses while still living in them.
Irvine-based Financial Freedom Corp. says one of the major reasons people buy its reverse mortgages is "lifestyle enhancement" -- extra money to have fun. Financial Freedom says it is on track this year to nearly double the 5,000 reverse mortgages it sold in 2004 in California.
The Brockmanns have resisted all such newfangled products, as well as the advice of their 55-year-old daughter. "Take out a line of credit and go travel," Sandi Bandfield said she had suggested. "Interest rates are so low, your payments would be next to nothing. You'd be enjoying life."
They already do. The couple's four-bedroom house is about four miles from the ocean, in a section of Huntington Beach just off the Beach Boulevard commercial strip. They bought it in 1964, using their accumulated savings from three previous houses to make a down payment. The purchase price: $26,500.
After 30 years, when the loan was paid off, they got a home equity loan to help their four children buy their own properties. That's it for debt.
"I don't know of any bills we have," said Bill Brockmann, who spent most of his career in the electrical industry. "My pension and Social Security aren't huge, but between them we do nicely. We don't require a whole lot."
As neighbors have come and gone, the couple stayed put. Late last year, the house next door was listed for $595,000, a high-water mark for the neighborhood. Everyone said the sellers were never going to get it, and then they did.
But even this couple has felt the lure of being a landlord. "We had good luck with a rental in Bellflower for five years," Bill Brockmann said. "After that couple moved out, the next was there only two or three months and kind of wrecked the place. I had to keep going back and forth. The upkeep!"
They sold the rental a decade ago. No regrets.
For their eldest daughter, the more houses the better. Bandfield was a medical transcriptionist until recently; her husband Bud, 49, is an independent electrical contractor. They bought their home in Boulder Creek, Calif., near Santa Cruz, for $157,000 in 1989. Substantially remodeled, it's now worth at least four times that.
Last year, the couple began talking about retirement. "We don't want to work forever, and someone's got to pay for this house," Bandfield said. "We have a nice life, but nothing in savings to speak of. I saw us relegated to a dinky gray condo in Las Vegas if we didn't do something."
Stocks? "I dabbled. I think I made $26 last year." Social Security? "It's piddly. Who wants to live like that?"
Real estate seemed the obvious, and only, answer. The couple attended seminars, began to educate themselves. They remortgaged their home to buy a three-bedroom in Visalia, then a two-bedroom cabin near Lake Arrowhead. More recently, they bought two houses in Colorado.
Buying houses to rent them out is a popular strategy. The National Association of Realtors estimates that as many as a quarter of all homes were purchased last year by investors, drawn by the lure of immediate rental income and long-term appreciation.
Bandfield's goal is 10 properties, each yielding $1,000 a month above the mortgage and upkeep. That would nicely fund their retirement. "If we don't do anything," she said, "we're going to have nothing."