NYT Gets It Wrong About Hard-Partying Homeowners Flushing Away Their Equity

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On page one of today’s New York Times, a story about homeowners defaulting on home-equity loans takes only five paragraphs to assume that the homeowners were being ridiculously irresponsible with their equity, spending it on “new cars and boats,” according to a real estate lawyer, who wouldn’t have a skewed view of things, would he?

The only problem is, this assumption – and the attendant blame – is false. Two studies that track the use of home equity credit over the course of the housing bubble document that people put most of their home equity loans right back into their houses.

That’s right: they reinvested in what they were told – by lenders, agents and the whole real estate economic establishment – that houses were assets that had never lost value in the course of U.S. history.
The scintillatingly named Emerging Cohort Trends in housing Debt and Home Equity, published in 2005 by the Harvard Joint Center on Housing, shows that very little changed from 1999 through 2002 – the beginning of the bubble – in how homeowners used their equity loans. The two biggest categories were home improvements and repayment of other debts – a category that can include the aforementioned cars and boats, but that also includes medical debt, student loans, and credit card debt.

In 2009, an analysis of the Federal Reserve Board’s Survey of Consumer Finances for 2007
found that the proportion of household debt for home improvement increased by 10% from 1998 to 2007, with a similar increase in debt for purchasing non-primary residences.

In other words, Americans doubled down on real estate specifically because it was supposed to be a no-lose, fail-safe investment. This would be a good moment to bury the image of crazy suburbanites spending the family room on a wild spree across Europe. Because by and large, that’s not what happened.