It was only a matter of time that people started using their homes as ATMs. It is clear that the housing cheerleaders are drinking a mega dose of housing Kool-Aid and somehow think that people are immune from repeating past mistakes. But here we are seeing cash-out refis hitting pre-crisis levels. And this assumption is based on the underlying mentality that yes, a home is really worth that amount and now people are locking in these high price levels. But guess what? You have to pay that money back on your glorified crap shack. This was one of the many reasons for the last housing bubble where people believed the hyped and went into deeper debt because of this notion that a home was an ATM with a roof on it. The overall tone is incredibly housing positive even though there are major issues in the housing market. For example, the homeownership rate is near generational lows and much of the household formation since the bubble burst has come in the form of rentals. Now homes are being used as ATMs. What can go wrong?

The housing ATM is back

People are once again using their homes like ATM machines. And of course contrary to anecdotal evidence, we have actual data on this:

By doing cash-out refis you are essentially locking in the current valuation of a home and this gives you little buffer should there be a correction (of course this will never happen according to some). Your debt load increases but this trend signifies something deeper. The delusion is running deep. You can look at crypto-currencies, startup companies, and even housing and we are in overvalued territory.

This idea that people are careful with their mortgages and their monthly payments is nonsense. A majority of people max out their lifestyle and are living on the edge when it comes to servicing their payments. They have mega mortgages, big car leases, kids in daycare, and their monthly bill is obscene. All you need is a minor correction and the house of cards will collapse. Tapping equity out of your house simply prolongs your obligations and assumes the good times will go on indefinitely.

This is largely symptomatic of a bigger issue here and that is people are still cash strapped. Even in neighborhoods that I am familiar with you have people living in million dollar homes being incredibly frugal with groceries because they can’t afford to get out of line in their budgets. These are typically your Taco Tuesday baby boomers. A new house hits the market and you have a professional couple or investor buying the place up. The older buyers are living modestly and are house rich, cash poor while their new neighbors are living a life of luxury supported by higher incomes. In many cases, people try to chase their neighbors and since their incomes can’t keep up, they tap their home equity to keep pace with the Joneses.

The amount of debt circulating in the economy is relatively high:

Housing related debt is creeping back up but non-housing debt is in deep record territory:

Many older boomers are now having to face the prospect of financing the college education of their offspring. So either you go into deep student debt for school or you can help finance a college education by your current resources. The housing ATM is an attractive choice.

What this shows is that people truly believe current valuations are solid and that prices will only go higher. The same mentality hit in the last bubble when people were tapping equity out of their homes. Of course this time it is more “sophisticated” and we won’t repeat the past.

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