Multiple factors have contributed to the current slump in the housing market -- a slump that has been proclaimed the worst in the past 16 years. One of the major causes of the current slump, however, can be attributed to the fact that more and more people have been using their homes as ATM machines. Whenever they want or need something that they cannot afford, instead of saving for it or denying themselves the luxury, they've simply borrowed against the equity in their homes -- either by refinancing or taking out a home equity loan or line of credit.

Of course, some of this borrowing has come from necessity. If a major breadwinner of a family becomes seriously ill and does not have sufficient medical and disability insurance, they may have no choice but to cash out the equity in their home. However, much of this borrowing does not arise from necessity. Many homeowners borrow money to pay for non-essential items, including vacations, home renovations, new furniture, fancy new cars, and so on.

When the housing market is booming and prices for homes are soaring, equity seems like a never-ending river of gold. You can borrow and borrow and borrow, because a couple years down the road, your home will be worth tens of thousands of dollars more than it's worth now, and you will still have plenty of equity to protect you. At least that's what the booming market of the past lulled homeowners into believing.

Now that real estate prices are on the decline in many areas of the country, homeowners who have cashed out all of the equity in their homes are facing a harsh reality -- negative equity. They owe more on their homes than their homes are worth.

If you are wondering why the housing market is slow right now, that is one of the reasons -- many homeowners simply cannot afford to move. As soon as they sell their homes, they need to come up with tens of thousands of dollars extra to pay off their loans, and they simply don't have the cash on hand to do that.

50 years ago, this problem was not as widespread as it is today for one simple reason: People tended to buy what they could afford; they worked hard to pay down their debts. For many homeowners, their goal was to have their home paid for by the time they retired, so they would not have a house payment in their golden years. In today's buy-now-pay-later society in which we use our homes as ATM machines, we have become much more vulnerable to slumps in the housing market. Now, when a slump hits, we cannot even rely on the equity in our homes to pad the fall.

For many homeowners, this message probably comes too late, but for those who are just starting out, I highly recommend that you work toward building up equity in your home. Work closely with your loan officer to find the lowest-cost loan available, and then pay down the principal on or ahead of schedule. If hard times hit, you then have a cushion to fall back on.

Published: December 11, 2007

Use of this article without permission is a violation of federal copyright laws.

Ralph R. Roberts, CRS, GRI is an award-winning and internationally recognized real estate agent, author, coach, and speaker. Throughout his career, Ralph has proven his commitment to helping other real estate and sales professionals build upon their past and present success, grow and expand their businesses, and provide a rich and rewarding future for themselves, their customers, their employees, and their families. As president and CEO of Ralph Roberts Realty, Ralph has personally helped thousands of consumers realize their dream of homeownership. While selling over 10,000 homes (and buying and selling over 3,000 investment properties) throughout his 30-year career, Ralph has made the time to mentor and coach hundreds of professionals in real estate, sales, and a host of other fields. Ralph is a recognized authority on Real Estate and Mortgage Fraud; Residential Real Estate; Personal Salesmanship; Sales Force and Office Management, Motivation, Design, and Team Building; and Foreclosure Self-Defense and Loan Modification, fields in which he has demonstrated his commitment to preserving the American Dream of Homeownership. Ralph's numerous websites, blogs, seminars, and speaking engagements engage, entertain, and educate both consumers and professionals. Ralph is also an accomplished author with several successful titles to his credit, including: Power Teams: The Complete Guide to Building and Managing a Winning Real Estate Agent Team Financing Real Estate Investments For Dummies (John Wiley & Sons) Mortgage Myths: 77 Secrets That Will Save You Thousands on Home Financing (John Wiley & Sons) Foreclosure Self-Defense For Dummies (John Wiley & Sons) Protect Yourself from Real Estate and Mortgage Fraud: Preserving the American Dream of Homeownership (Kaplan) Foreclosure Investing For Dummies (John Wiley & Sons) Foreclosure Myths: 77 Secrets to Saving Thousands on Distressed Properties (John Wiley & Sons) Advanced Selling For Dummies (John Wiley & Sons) Flipping Houses For Dummies 52 Weeks of Sales Success (John Wiley & Sons) Walk Like a Giant, Sell Like a Madman (John Wiley & Sons) Cross-Cultural Selling For Dummies (John Wiley & Sons) To learn more about Ralph, visit AboutRalph.com, check out his daily insights on real estate and mortgage fraud prevention at FlippingFrenzy.com, or visit his latest blog dedicated to helping distressed homeowners fight foreclosure, KeepMyHouse.com. You can reach Ralph at or by calling (586) 751-0000.