'Overpriced' homes become debt traps

Just when your stock portfolio hits a new bumpy trough of performance, those friendly folks at the local bank are offering a soft pillow of relief.

Need a little extra cash to fix up the house? Sign up for a home-equity loan.

Going on vacation? Don't put it on a credit card. Open a line of credit instead.

Not only do you get a low rate – sometimes 4.75 percent or less for the best customers – it's also usually tax-deductible.

Now, some experts are raising warning flags about housing values. Their advice: Don't bank on your house continuing to rise in value. Depending on where you live, it may be overpriced already.

Consumers should approach low-cost home loans and lines of credit with caution, credit counselors say. Although they can help lower monthly payments if used judiciously, those tempting offers can also lead to more burdensome mortgage debt. And unfortunately, an increasing number of Americans appear to be taking on larger and larger amounts.

They're buying bigger homes and taking on bigger mortgages. According to new census statistics, the fastest-growing segment of homeowners during the 1990s was the group carrying the heaviest mortgage debt load. And as many Americans have found out – often from bitter experience – you can't always count on rising housing prices to bail you out.

Consider Connecticut. Hit by recession in the early '90s and the downturn in post-cold-war defense spending, the state saw housing prices swoon. As a result, people carrying huge mortgages suddenly found themselves in deep trouble.

"We had folks coming through the door that owed more on their house than the house was worth," recalls Ron Ramos, director of counseling for the Consumer Credit Counseling Service of Southern New England.

And getting them out of debt meant making stark choices: giving up a luxury car, private school for the children, even sometimes the house itself with no cash to show for it.

By 1999, Connecticut's housing market still hadn't clawed its way back. According to census figures, the typical single-family home (not including condos and other kinds of houses) actually was worth $133,000 – $500 less than in 1989.

Factor in inflation, and 11 states saw their housing values fall during the period, including California, Hawaii, and a swath of East Coast states from Maryland all the way up to Maine.

More recent evidence suggests property values in many of these areas have gone back up. What economists are debating now is whether other states are ripe for a bubble-bursting swoon.

Optimists say it's unlikely. For one thing, housing markets don't operate like stock markets. They are local and less liquid. So a real-estate boom in, say, Florida, has little if any effect in Illinois. Thus, any impact from a sudden collapse in housing values would probably be limited to a specific metropolitan region.

"There is absolutely no housing bubble on a national basis," says David Berson, vice president and chief economist with Fannie Mae, the nation's largest provider of mortgage funds, based in Washington, D.C. There are only a few places where a bubble might exist, he adds.

The big question: how many of those places there actually are.

Mr. Berson points to surveys from the Federal Housing Finance Board showing that home buyers have pulled back somewhat from putting little money down for real estate.

In the mid-1990s, the average downpayment was just under 20 percent. Today, it has risen above 23 percent. And while it's true many people are refinancing and pulling cash out of their existing homes, Fannie Mae's internal data suggests that on average they still have more equity than when they bought the property.

Other analysts are more skeptical. "There are a lot of markets that are in a housing bubble," says Ingo Winzer, president of Local Market Monitor in Wellesley, Mass.

Mr. Winzer tracks the relationship of income to housing prices in 120 local markets. And right now, he says, 45 percent of them are overpriced – a record.

"People right now apparently are willing to go into debt more than ever to buy a house and other stuff," he adds. Among his top overpriced markets: Boston, San Diego, Detroit, and Denver.

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