28 August 2005

Living in Your ATM

Posted by Jameson Penn
Common sense dictates that if something seems too good to be true, than it probably is. As home equity increases, more and more people are taking this to mean that they've struck it rich.

Suddenly, a no-interest, no money down "investment" in a fabulously over-priced condo, townhome, or single-family home is perceived as a golden opportunity for the homeowner. Refinancing that mortage will further draw down equity (if there even is any), but the homeowner walks away richer, at least in the short-term. While this may seem like something you've seen on a late-night "get-rich-quick" pyramid scheme infomercial, that's probably because it has been. In reality, money has not been created for the homeowner, but rather squeezed from their future.

On a macroeconomic scale, think of the consequences of inflation, where the government devalues the dollars held by consumers. In the short-term, everyone holding those dollars feels richer because of the sudden inflow; however in the long-term, inflation leads to the decline in the dollar's stored economic value. The same can be said for all of this "easy money" that is flooding the pockets of homeowners.

It is my opinion that low interest rates and the (artificially) sustained high demand for consumer goods is masking the drastic effects of our general homeowner binge. The Fed will typically raise interest rates to slow growth that may be leading to economic overdrive.

Further compounding the complexity of the situation we currently find ourselves is the fact that people feel richer, unemployment continues at an all-time low rate, and interest rates are still far below historical levels. I can't help but be afraid we are on our way to experiencing our own 10 years+ recession that Japan only recently emerged from.

Indeed, a cautious, if not scary indication of what may come if we don't reign in our consumption and giddy allergies to true equity.

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