Some good housing market news.

And good housing market news is good economic news.

Homeowners are enjoying more equity to burn than ever.

It's tough for first time homebuyers to find financing, refinancing ain't easy and you may not be able to tap as much equity as you think you have.

However, if you've owned a home for just several years or more (less in some still hot market pockets), you continue to enjoy what the Milken Institute once referred to as the "psychological equivalent of gold".

A recent slide in equity use may not bode well for the economy ahead, but right now? Homeowners are tapping greater levels of equity than in any economic recovery since 1960, according to the Economic Policy Institute, an independent think tank for economic concerns.

Even many income-poor homeowners feel like they are loaded.

Forget for a moment that the real estate market is not in a recovery mode just yet. The rest of the economy is growing and consumer spending is the boost that's making it boom, if only a little.

Today, a lot of that extra spending still comes from the money-to-burn power of homeownership.

First quarter 2007 home prices were up an average 4.3 percent from a year ago, with only two states showing negative price movement, according to the Office of Federal Housing Enterprise Oversight (OFHEO) Home Price Index.

The market was tighter in the second quarter, but the national median for existing-home prices in June 20070 remained ahead of June 2006 by 0.3 percent, according to the National Association of Realtors.

But the slowdown comes after five years of massive equity gains averaging 53.53 percent nationwide. Nearly half the states enjoyed equity gains higher than national average, according to OFHEO.

EPI says the most common way for households to extract liquid assets from rising home values is through "mortgage equity withdrawals" or "MEWs" -- taking on higher levels of mortgage debt in exchange for "cashing out" some of their home's accumulated equity.

Cashed-out equity can be used to increase a household's purchasing power. Right now that means purchasing power perhaps like never before.

EPI says the average value of MEWs (expressed as a percentage of personal disposable income) in the current recovery is 5.8 percent -- more than double the average rate in any previous recovery since 1960.

But MEWs use peaked in the first quarter of 2006 and is now down more than 3 percent since then.

An equity loan, by its very nature, is an equity depleting loan.

Conservative financial experts advise against ever using your equity. They say the idea behind a 30 year mortgage is to give you enough time to comfortably pay it off before you retire so you can live "rent free" on your fixed income.

Most financial and investment experts say it's OK to use equity for capital improvements and investments that provide an equal or better return on your money than the cost of the loan. Certain home improvements, education for the kids and new business financing are relatively better uses of equity than say buying cars and boats, debt consolidation and vacations.

An exception to all the rules, is to use your equity for emergencies and unforeseen events of limited duration that might reduce your income or place added demands on your wages, including births, deaths, illness, injuries and job loss.

Financial planners and investment counselors say the first line of defense in any household budget is not an equity loan, but a highly-liquid emergency savings account that can handle at least six months worth of household bills.

For those who've been unable to put aside such an emergency fund, the inability to save could be a red flag warning you about your ability to repay a loan during hard times.

If you do go the equity borrowing route, it's crucial to consider how you'll repay it -- not to mention your first mortgage and any other bills -- especially if you are unemployed for an extended period.

"Replacing this purchasing power should be a crucial concern going forward," the EPI brief says.

Log in to comment