'Overpriced' homes become debt traps

In a recent report, Ian Morris of HSBC Securities in New York warned that housing prices had reached new highs. For every dollar of disposable personal income in the United States, there's $1.62 worth of residential real estate. The disparity hasn't been that wide in at least 50 years, Mr. Morris warns.

This willingness to accept higher levels of debt has been building for some time. And some of the biggest rises in mortgage debt this past decade came in states that experienced the largest boosts in real-estate prices.

Take Utah. Between 1989 and 1999, it saw the price of a typical single-family home rise by 64 percent even after accounting for inflation. Meanwhile, its number of heavily indebted homeowners more than doubled. By the end of the decade, almost 1 in 6 of its homeowners spent at least 35 percent of his or her monthly income on mortgage payments, real-estate taxes, and utilities.

In Washington State, 1 in 3 homeowners fell into the 35 percent and over category.

"That's actually pretty high," says Ed Pearce, executive director of Consumer Credit Counseling Service of Columbia in Columbia, S.C.

Until the past few years, the rule of thumb had been that housing costs should not exceed one-quarter of one's monthly paycheck. "What we're seeing is a lot of people attempting to live above their means," Mr. Pearce says.

In half the states, the fastest-growing type of house during the '90s was also the largest: nine rooms or more.

The rise in housing prices and sizes won't disturb the economy as long as people have jobs that allow them to afford these homes, mortgage experts say.

Unfortunately, these experts are far more adept at projecting mortgage payments 30 years into the future than in forecasting the next quarter's unemployment trends.

When home-equity offers come in the mail, Larry Quandt throws them away unopened. "Once in awhile you take a look, but you usually find a 'gotcha' line in there," says the retired southern Illinois farmer.

Farmers know about "gotcha."

After loading up on rapidly appreciating farmland in the 1970s, many had to sell out in the '80s when land values fell 60 percent and more.

Do today's homeowners face similar dangers?

First, the good news. The value of the average American home has never fallen in any year since at least the late '60s (and, quite possibly, not since the Great Depression). And demand isn't drying up. The National Association of Realtors expects sales of new and existing homes to set records this year.

While housing prices have dipped from time to time in some local markets, it takes some external shock – usually massive layoffs – to send prices tumbling. High or rapidly rising housing prices don't necessarily foretell trouble.

Unfortunately, there's no sure-fire method to predict the next recession. So the best way to avoid a nasty surprise is to ensure you're not taking on too much house debt. If you're spending more than a quarter of your gross household income on mortgage payments, real-estate taxes, and utilities, then it's probably time to take stock.

Feeling squeezed? Do debts keep building? If so, credit counselor Ron Ramos has two words for you: "Stop borrowing."

"Clearly, the refinancing of your mortgage is a great quick fix," says Mr. Ramos, director of counseling for the Consumer Credit Counseling Service of Southern New England. "But have you cured the challenges that have gotten you into this?"

One way to find out is through professional help. Seek an accredited credit-counseling organization that doesn't charge big fees. "If it's in excess of $100, take a closer look," says Ramos, whose Boston-based outfit is accredited by the nonprofit National Foundation for Credit Counseling.

Counselors typically analyze current spending habits then find areas that could be cut. If necessary, they design a debt-reduction plan. Creating a realistic budget and sticking to it will go a long way toward curing bad habits. Increasingly, Americans are carrying heavy mortgage burdens. But a few common-sense steps can keep your home from becoming a crushing load.

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