Middle Class HELOC Abuse
Country House -- Blur
The posts we do on over-the-top HELOC abuse are gripping because the dollar amounts are so large. However, focusing only on the extreme cases gives the impression of HELOC abuse is an unusual behavior of a few spectacular cases. HELOC abuse is not unusual or uncommon: it is widespread, and it is going to pummel the middle class.
What possesses people to borrow and spend so much money that they lose their homes? The simple answer is that they didn't think they would lose their homes. Most believed their house values would go up forever and their house would pay off all their debts. All they had to do was continually refinance with very low interest rates and service the debt will a little of their work income. It never occurred to them that they might actually be required to pay down this debt with their wage income. But even if people drank the kool aid and believed this pathological nonsense, why did they take the money out and spend it? Why not let it accumulate and build wealth? Our song today is about being caught up in the "rat race" and leaving it all behind for a house in the country. Many people who spent their equity were caught up in the rat race trying to "keep up with the Jones's." It is sad really.
I received an email from a reader some time ago telling the story of what happened to his group of friends during the bubble. A few of his buddies really drank the kool aid and began separating themselves from the rest of group. They were spending beyond their means acting rich and feeling superior to the members of their old clique. The remaining group that either rented or lived within their means remained friends and watched with amazement as their former friends spent lavishly entertaining the "in" crowd and worked to increase their social status. As you might imagine, the bills are now coming due and the housing ATM has been turned off. The illusion of wealth and status these people created is disappearing as well. Not surprisingly, the fiscally responsible members of the old circle of friends are responding with a mix of sadness and schadenfreude. Stories like this are more the rule than the exception.
Today's featured property is a typical, middle-class Irvine house. Perhaps a little above median, but certainly the kind of home a family making $125,000 a year (middle class in Irvine) should be able to afford. It is another sad and common story of HELOC abuse on a middle-class scale.
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