I have a serious prejudice here. I believe every American ought to own his or her home and ought to take serious pride in it. It’s a place where one goes when feeling terrible. We go there to think, to wish, and to take off the shoes that just don’t fit well. That’s important.
We have a new threat to home ownership that bothers me. Society has created the “reality” that we must all drive a big SUV, watch a big screen TV, and vacation on the ski slopes. Every conceivable information source encourages us to buy, even if there’s no money, simply because we have a credit card. This signifies we’ve entered the American lifestyle, and our economy is booming because we’ve followed this advice.
The threat is not the credit card. Presumably, we all find that the card goes only so far before they don’t let us use it anymore. The threat is something we as a society have created, and now advertise to be equally the American Way, the Home Equity Line of Credit or HELOC.
In days gone by, when I did a real estate closing, I could expect one who had owned his home for several years to walk away with equity. That equity was used to buy another home and eventually used for retirement, or sometimes even for ridiculous things, like giving it to the children. Nevertheless, there was some equity and savings involved in the whole matter of owning a home. In fact, I could easily say to classes of young real estate students that they would be dealing in the one most important asset that most people would ever own, their home.
Those days are gone. Today, we are encouraged to spend because it makes the economy stronger. Then, respectable institutions, and I consider myself a part of that, encourage spenders to wrap their MasterCard balances into Home Equity Loans because the interest rates are lower and they can write-off the interest. We have created this painless way to let people spend themselves into oblivion. Some investor will then buy stock in a mortgage company that very shortly will dictate the terms by which you may or may not continue to own your home.
I am of the opinion that a HELOC used for consumer spending is like planting a giant mushroom under your home. You can’t kill it, and it does not go away. The only way to feed it is to hope the home sells for enough to pay off all the mortgages; and move to some corn state, where the taxes are lower and plan to end your days smelling tractor fumes. Our children may be the ones mostly concerned, since they will end up supporting us, assuming they have not fallen into the consumer-HELOC trap as well.
Please don’t misunderstand; I am not saying that a HELOC is always bad. I am saying that borrowed money is bad money on any but a short-term basis if it’s purpose is consumer spending. The premise is that we are only successful people if we buy and consume lots of “stuff”, and if we don’t keep up, it’s because we obviously aren’t creative enough to figure out how to borrow more money. I don’t buy that, and I don’t want you to either. There is a greater priority than that, and it requires long-term planning, saving, and investment.
I want the home we all live in to be a major part of our investment strategy, and it breaks my heart to see people treat that investment casually. There is nothing on TV, and certainly nothing that merits a loan to be able to see it “bigger”. Do not borrow money to spend; borrow money to invest. Your children will be happier, and in the long run my guess is you will be as well.
It’s hard enough for young people to buy a home. I don’t want them to jeopardize their investment by confusing painless availability of consumer credit with intelligent investment.