In debt we trust

Free money.

That’s how some of Kay Shirley’s clients describe their view of low interest rates. They buy expensive new cars because of it. And they refinance their mortgages and cash out to buy consumer goods because of it too.

Some use those cash-outs to pay down credit-card debt, a choice that Shirley, an Atlanta-based financial planner, encourages. Unless, she said, they then use that freed-up capacity to run up more debt.

“The problem that a consumer has to worry about is whether or not spending habits have changed,” Shirley said. “It is not advisable to pay off consumer debt with equity in the home, unless you are truly paying off that debt once and for all.”

Consumers’ attitudes about debt have shifted. The change is mirrored in everything from credit-card spending habits to views about bankruptcy, and even extends to home ownership.

The boom in housing has been credited to low interest rates, but new attitudes toward debt are a factor as well. Easier financing and less stigma over debt mean more people can manage to buy into the housing market or trade up to a more expensive house.

That creates more demand for ownership housing and more potential customers for realty and mortgage brokers.

Robert Manning, author of Credit Card Nation, calls the new attitude nothing less than “a cultural transformation.”

The shift has happened across generations, but is most noticeable among younger consumers.

Consumer credit is no longer viewed as a privilege. And young people aren’t rewarded for first getting a job, then obtaining credit, as evidenced by the intense marketing of credit cards to college students, said Manning, a professor in the college of business at the Rochester Institute of Technology.

The societal stigma of carrying “bad debt” (e.g., credit cards) and “good debt” (e.g., mortgages, business loans) is disappearing, he said. Credit-card debt is considered simply a part of being an adult.

“Young people just assume that if they’re going to maintain close to the lifestyle of their parents, it means getting into debt much younger in life,” Manning said.

That means they’re not saving much money, and consequently they don’t have a down payment when the time comes to buy a house. No problem, a 20 percent down payment is no longer the standard as it was in the past.

“The fact that you don’t have to have any money down to buy a house is certainly symptomatic of credit problems in this environment,” Manning said.

Homeowners still prefer the stability of fixed-rate mortgages, but adjustable-rate mortgages have gained popularity despite the financial risk.

Jennifer and Daniel Baderschneider, both 24, opted for an hybrid ARM when they bought a condominium in Hightstown, N.J. That decision, which will save them $145 a month, surprised some older people they know. The older people worried the young couple would be face much higher interest rates when the initial fixed rate expires in seven years.

The Baderschneiders said they’ll be ready to move into a larger house in about five years, long before the ARM portion of the loan will start.

That plan to move within a few years has become more common as well. Some homeowners genuinely outgrow their houses. For others, only their expectations will outgrow their homes.

“They’re climbing that social status ladder,” Shirley said.

That means trading in their home for a larger one to match their ratcheted-up lifestyle, she said. For those homeowners, eventually paying off a mortgage isn’t much of a consideration.

Homeowners who repeatedly trade up to more expensive houses are less likely to pay off their mortgage than are homeowners who remain in their first or second house and continue to make payments on the original mortgage.

Trading up houses brings higher levels of indebtedness, which homeowners have been able to carry because of the “free money” of low interest rates, Shirley said. If they suffer a setback such as a job loss, however, that high debt load can be difficult to carry.

If they get into serious financial trouble, however, declaring bankruptcy no longer carries the same social stigma it once did, Manning said.

No one argued that low interest rates or lower down payment requirements are bad. They’ve helped many people become homeowners who otherwise couldn’t have. The problem lies in how people view the mortgage debt.

Roger Tutterow, an economics professor at Kennesaw State University in Georgia, believes the drastic appreciation in housing prices has led some homeowers to become  less risk averse. They look at their houses as free money, and they will cash out the equity to buy consumer good or pay for vacations.

In past years, refinancing was primarily as a way to lower monthly payments or shorten the loan term, he said.

“The problem with cashing out is that it gives (the homeowner) a significant chunk of buying power, and it’s very tempting to use it at that time,” Tutterow said.

The cash-out-and-spend is tempting because interest rates are low, consumer spending is culturally encouraged and debt is viewed as necessary to maintain a certain lifestyle.

“Part of it is just a general shift away from more conservative values in financial dealings,” Tutterow said.

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