Current rate on home equity line

HOMEOWNERSHIP | Don't lose sleep over reports about DECLINING EQUITY.

HOW CAN IT be? The Consumer Federation of America and economists at Freddie Mac, the influential mortgage company, report that U.S. home-equity growth is dead in the water, once you adjust for inflation.

How can this be possible? We're slowly coming down from one of the boomiest housing markets in history. Inflation is moderate, and the percentage of Americans owning their own homes is higher than ever.

"In a period when income and wealth have grown rapidly, it is worrisome that home equity has been stagnant," cautions CFA executive director Stephen Brobeck.

The study notes that between 1989 and 1999, average home equity declined from $91,000 to $89,500, in inflation-adjusted dollars. The authors cite two important reasons for the apparent stagnation: more first-time buyers using low-down-payment mortgages to get into a house, and increased borrowing against equity by current homeowners.

The good news is that, even when adjusted for inflation, equity grew by 6% for low-income families over the decade. Many of these households are first-time owners who have helped drive the nation's homeownership level to a record 67.7%.

But there has to be bad news, too, right? If low-income families registered gains and the overall inflation-adjusted average equity growth is negative 2% for the decade, high-income homeowners must be squandering their equity, right? Hardly.

Frank Nothaft, a deputy chief economist at Freddie Mac who analyzed the CFA report data, isn't alarmed. He points out that the study period started with a severe housing recession on the East and West coasts and didn't include the huge gains in those markets in 1999 and 2000.

Homeowners themselves are partially responsible for the "stagnation." More people have taken advantage of good economic times to move to bigger, more expensive homes, which usually come with significantly bigger mortgages. Record numbers of people bought homes in 1998, 1999 and 2000--roughly five million each year. Yes, they have a relatively large loan-to-value ratio in the first few years of living in their new home. But their equity will grow as they make monthly payments--and as local property values rise. This is a marker of progress, not profligacy.

Borrowing against equity. Many homeowners who didn't move up to their dream house borrowed against their equity to finance remodeling projects. Their increased home value is not reflected in the equity study, but their indebtedness is.

It's hard to argue that home-equity borrowing is a bad thing, since it is often the cheapest form of debt around. Borrowers in the market for an equity-backed line of credit are a lender's dream. And that translates to low-risk, low-rate loans. Rates on home-equity lines of credit averaged only 0.75 percentage point over prime as of June 2000, which is significantly lower than the 1.33-percentage-point spread that prevailed during most of the decade. The frosting on the cake: Interest on home-equity loans is tax-deductible, further reducing the true cost.

So what's so alarming about homeowners taking advantage of their otherwise illiquid home equity to spruce up their home, educate their children, and pay for a new car with the cheapest credit on the market? It sounds like clear-headed money management from here. --Reporter: CHRISTINE PULFREY