As they happily watch their houses swell in value, Americans are changing their attitudes toward mortgage debt. Increasingly, a home is no longer a nest egg whose equity should never be touched, but a seemingly magical ATM enabling the owner to live it up or just live.
Homeowners who refinanced took $59 billion in cash out of their houses in the second quarter, double the amount in the year-ago quarter and 16 times the average rate of the mid-1990s, according to data released last month by mortgage giant Freddie Mac.
People are cashing out so quickly that the term "homeowner" soon might be inaccurate. Fifty years ago, the average American owned three-quarters of his house and the lender owned the rest. These days, it's approaching an even split.
This "spend now rather than save for later" phenomenon has produced undeniable benefits. Experts credit home equity loans and other methods of tapping rising home values for fueling the nation's economic growth. Also, additional real estate investments financed by home equity have contributed to the rising home prices that bring owners such pleasure.
But the spending spree is coming at a price. Consumers' eagerness to tap home equity is contributing to a low savings rate that is making many Americans woefully unprepared for retirement, financial advisers say.
Should mortgage rates rise sharply or home prices fall, many homeowners could face financial turmoil. They might be unable to service their loans or could find that their homes are worth less than their mortgages.
Such a prospect seems unimaginably distant to Doug Levy, a university administrator in San Francisco.
When his two-bedroom condominium rose in value by 10 percent - which took only nine months in the hot San Francisco Bay Area real estate market - Levy refinanced his mortgage, converting some of his added equity into cash. He used the $25,000 to pay bills and take a modest skiing vacation in British Columbia. He's considering tapping his equity again if his condo continues to rise in value.
"It's like I'm sleeping in my piggy bank," said Levy, 44. "In this market, real estate is a liquid asset."
Bill and Barbara Brockmann have a different view of their house. The retired Huntington Beach, Calif., couple is sitting on a half-million dollars of equity, but they're ignoring it. They aren't drawing on it to buy a new car or invest in a condo in Miami.
"I don't like debt," said Bill Brockmann, 79. "I don't buy anything I can't pay for."
Such old-fashioned thriftiness has gone out of fashion. What was once considered undesirable - taking on large amounts of debt - now is seen as smart. And what used to be smart - becoming debt-free - is described as imprudent.
"If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years," said David Lereah, chief economist of the National Association of Realtors and author of Are You Missing the Real Estate Boom? "It's as if you had 500,000 dollar bills stuffed in your mattress."
Anthony Hsieh, chief executive of Lending Tree, an Internet-based mortgage company, used a more disparaging term. "If you own your own home free and clear, people will often refer to you as a fool. All that money sitting there, doing nothing."
The financial services industry is doing all it can to avoid letting consumers be foolish. Ditech.com touts its loans as a way to pay off credit cards. Morgan Stanley says equity loans are a good way to finance education expenses. Wells Fargo & Co. suggests taking a chunk out of your house to finance "a dream wedding."
One obvious reason for the 69 percent rise in mortgage debt over the past five years is the exploding cost of homes, which has far outstripped wage growth. That has led many buyers to tap innovative interest-only loans and meager down payments, both of which lower their equity.
The number of buyers whose down payment amounted to less than 5 percent of the purchase price rose from 30.6 percent in 2000 to 38.1 percent this year, according to a new study by SMR Research Corp. of Hackettstown, N.J.
Levy, the university administrator, found that cashing in quickly made sense. He bought his condo in expensive Marin County, north of San Francisco, for $510,000 in April 2004. The bank offered to finance the whole thing, but he decided to put 5 percent down.
By January 2005, the condo was worth $555,000, and Levy decided to refinance. He took out $25,000 in cash, less than the bank offered to give him. It paid off what he describes as "really ugly" credit-card debt.
Because the interest rate on the credit card was more than double the rate on his mortgage, he saved about $600 a month. Furthermore, his mortgage interest is tax deductible. His credit-card interest was not.
The temptation to add on debt can be overwhelming. Between 1997 and 2003, the percentage of people who owned their homes outright, without any mortgage debt, declined from 38.9 percent to 34.6 percent, according to census figures.