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The Home Becomes a Piggy Bank Once Again

Rick Newman

If a fancy new car appears in your neighbors' driveway and you wonder how in the world they can afford it, consult the consumption playbook circa 2006.

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Nearly seven percent of new-car buyers used a home-equity loan to finance the purchase during the first half of 2012, according to CNW Research of Bandon, Oregon. That's 52 percent higher than the rate in 2011, and the first meaningful jump in the use of home-equity loans for car purchases since banks pulled back on such lending starting in 2008. It's also further evidence that the housing market is stabilizing, and that housing may eventually help boost an economic recovery.

The widespread use of home-equity loans to fund car purchases, home renovations, college and vacations was a hallmark of the housing bubble. As home values skyrocketed and equity rose, many home owners basically considered home-equity loans to be found money, especially since they figured home values would rise indefinitely. That gusher of cash pushed sales of cars, appliances and other things to record levels in 2006 and 2007.

The housing bust ended that party, of course, and home-equity lending dried up as home values fell and equity evaporated. But now, home-equity lending is making a comeback, especially in areas where the housing market appears to have stabilized.

In six states--California, Colorado, Florida, Illinois, New Jersey and Rhode Island--more than 10 percent of buyers financed a new car with a home-equity loans this year, according to CNW's data. Such financing is still far below peak levels of 2007, but it may be high enough to keep car sales from falling, even as the overall economy weakens.

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Any pickup in home-equity lending is a tangible sign that banks believe the housing bust is over. "The housing market has probably bottomed, which gives lenders a lot more confidence when extending home-equity credit," says Keith Leggett, senior economist at the American Bankers Association. "They're less likely to do that in markets where prices are still falling."

Buyers qualifying for such loans are most likely wealthier consumers with good credit who have owned their homes long enough to have equity that wasn't zeroed out by the housing bust, which slashed home values by about 33 percent, according to the S&P/Case-Shiller home-price index. Using a home-equity loan to finance a car or other purchase--if you're lucky enough to qualify--can be a shrewd move, because the interest on home-equity loans is usually deductible. There's no such deduction for ordinary car or consumer loans. So home-equity borrowing can cut the cost of a major purchase by thousands of dollars.

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There are signs that consumers are starting to use home-equity loans for other types of spending as well. Harvard University's Joint Center for Housing Studies predicts that spending on home improvements will pick up by the end of 2012 and grow by double-digits in 2013. That forecast doesn't measure home-equity lending per se, but it does by proxy, since many homeowners use home-equity loans to remodel.

After prior recessions, the housing sector has been a key source of growth that helped drive a recovery. But this time, it's been a net drag on the economy, one reason the so-called recovery has been so weak. A pickup in home-equity borrowing won't be a cure-all, and it may never reach the heights it did during the housing bubble. But it may finally signal that the housing market is getting back to normal.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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