Sunday, April 06, 2008

Credit Crunch Hitting Higher Income Homeowners

by Calculated Risk on 4/06/2008 08:34:00 PM

The San Francisco Chronicle has a story about how the credit crunch is hitting higher income homeowners: Lenders retreat as housing market plummets

[Brent] Meyers began his landscaping project in January, expecting to draw on his home equity loan to pay [the landscaper $75,000 for the project].

When Meyers took out the credit line in November 2006, his home was valued at $1.475 million. With less than $1 million in principal outstanding on his first mortgage, he had a comfortable equity cushion to cover the line.

A few weeks ago, Meyers got a letter from Bank of America informing him that the line had been suspended in its entirety. When he called to ask why, he was told that his house had dropped to an estimated $1.09 million in value, which left insufficient equity to cover the line.
Meyers isn't exactly a hardship case. Unlike some who have had their credit cut off, he has other resources to fall back on. He intends to complete his landscaping project and will sell stock to pay for it.
Still, losing the credit line is prompting him and his wife, Deborah, to retrench.

"I'm going to change my spending behavior because I lost access to $180,000," he said. "We're going to be deferring other expenditures to build a pot of money to replace what Bank of America took away."
This shift from borrowing to savings is probably happening all across the country as the "home ATM" is being closed. In the long run this is healthy for the economy. In the short run, more savings has a negative impact on consumer spending and home improvement spending.