Rising Home Values Save Economy

When you bought a home, you never expected a windfall in as little as three years. But many homeowners are watching their home equity rise to unprecedented levels, proving that home ownership is not only a good investment decision, it's also a very useful source of cash. The wave of home sales and refinancing throughout the country are providing cash to support home improvements, retirement, college tuition and other purchases. Not only is that good for homeowners, it's actually providing a safety net for the faltering economy, as refinancings and home equity loans generate enough consumer spending to give the country a shot in the arm.

Approximately two-thirds of the nation's homeowners are riding the crest in appreciation, a spectacular $2.5 trillion rise in home values over the last three years. Home prices have been shooting up, scoring annual double-digit gains nationally. The median price in June was $152, 600, up almost 9 percent already from last year. Some metropolitan areas are experiencing a huge boom with homes doubling and even tripling in value. All that equity allows homeowners to save or spend, depending on their needs. It's an opportunity to cancel private mortgage insurance, and save hundreds or thousands per year in premiums. Homeowners with a 20% equity level (25% if your mortgage is less than five years old) are typically eligible for cancellation of PMI, so long as you have a good payment history. Perhaps your high interest credit cards and other consumer debts are pinching you. Within reason, you can fold those debts into a home equity loan with a lower interest rate and lower monthly payments, and even deduct the interest on any loan amount up to 100 percent of your home's value.

But on the spending side, as homeowners cash out on their equity or sell their homes at a substantial gain, the money is pumped into the economy. Experts are saying that rising home values have been the last line of defense against recession. "The housing sector has been a very important contributor to the American economy and, I think, one of the major reasons why that litany of negatives which you can easily line up has not in fact cracked the economy's underlying stability," Federal Reserve Chairman Alan Greenspan recently told the Senate Banking Committee. "The rise in the value of homes -- which if anything has accelerated during this period of rapid decline in stock prices -- has created a very substantial buffer of unrealized capital gains, which are being drawn down through the home equity market, through cash-outs, through the turnover of existing homes," he said.

On a cautionary note, some experts are skeptical that the boom will last forever. After the housing boom of the 1980s, losses of 10 percent in home prices soon followed in the early 1990s. Harvard University housing experts are saying that consumers are not gaining if they are using their wealth on paper to increase their housing debt to higher and higher levels. Today's $5 trillion in mortgage debt is more than the total debt of corporations and the federal government combined.

Sources used to create this article include Patrice Hill and The Washington Times.