I don’t usually pay much attention to the junk mail that I regularly get, but I received an email from Yahoo! Real Estate that had the subject: Use Home Equity to Finance Your Next Big Dream. With a subject like that, I just had to take a look. Clearly, we are all aware of the state of the economy, which is largely due to the declining real estate market that was fueled by aggressive lending and the combination of people borrowing more money than they could afford. So, I had to wonder what Yahoo! was up to.
Upon opening the email, you are presented with this nice ad that portrays a beautiful home with a pool:
Way to Go, Yahoo!
Well, where do you even start with an ad like this? The subject alone is bad enough, and it basically tells people that their home equity can be used to finance anything. Of course, they use the word “dream” and accompany it with a picture of a house that many people would love to have.
They also go so far as to call your home an investment by saying, “Discover how to make the most of your big investment.” Wasn’t this part of the whole problem to begin with? People jumped into buying a home when the market was hot thinking it was a good investment. Studies show that over the past 30 years, real estate has only averaged around 8.5% annual returns. Seems good, but after inflation, the costs associated with selling a home, and then the likelihood of buying a more expensive home with your profits, the net returns aren’t very good. A home is a place to live, first and foremost, and a possible investment second.
Also, how is converting the equity, or your gains, making the most of your “investment?” You’re taking money that you have made, at least on paper, and basically tacking interest on it. Sure, it is possible to strategically use that money to further enhance your home or have the potential to realize even more gains down the road, but this is far from a sure bet. I hardly see this as making the most of an investment, especially with current market conditions.
Turn Your Equity Into Cash!
And an advertisement like this wouldn’t be complete without stressing the fact that your equity, which is tied up in a hard asset, can be easily turned into cash. What wouldn’t appeal to a struggling homeowner more than being able to get seemingly free cash? Again, the use of equity in your home is being likened to treating it as a checking or savings account to free up money when you otherwise don’t have enough.
What do You Think?
Is it just me, or does an advertisement like this seem almost reckless? I realize that they are only promoting their real estate site, but they are doing it by targeting people who are looking for ways to make ends meet or need money to buy something they obviously don’t have money saved up for. I was used to seeing ads like this over the past few years, but to see something like this now, given the current state of the real estate market and economy, it is a bit surprising.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
"Similarly, I cringe every time I see the Scotiabank “you’re richer than you think” ads. These guys are apparently still offering 40-year no-downpayment loans. I’m glad I don’t own any Scotiabank stock."
Warning: CIBC is starting to do the same. Arguing it's a means for us under 30's priced out of the local housing market to get a home despite our huge student loans.
The truth of the matter is, we Gen-Xers in Canada are priced out of house and home in cities like Vancouver, Victoria, and Halifax, because these cities are retirement heavens for wealthy baby boomers who drive up the cost of land values, and thus real estate. These cities then become "tourist towns" with low level service industries being developed to supply the wealthy retiree community, yet high housing costs.
The existing boomers already there make things just as awful, as they want to use that house they fortunately bought in the 1970's as a retirement fund rather than saving, so they too, can be like the wealthy retirees they see moving into our "tourist towns".
Today is a horrible time to be young. Savings doesn't actually do anything. There are no tangible goals to accomplish with the savings you can/could accumulate as a young working man.
You can't save for a down payment, it is simply too much and too far out of reach in a reasonable amount of time. I'm confused exactly what a young person such as myself is supposed to do with 10K savings in my bank account. I'm very poor, I need help right now. I want to invest that money towards immediately short/medium term investments that can help my situation, but can't find any use with these savings so I continue to horde more and more cash without purpose...
Similarly, I cringe every time I see the Scotiabank "you're richer than you think" ads. These guys are apparently still offering 40-year no-downpayment loans. I'm glad I don't own any Scotiabank stock.
A local radio advertisement for a home equity lending broker (who charges high interest) has a catchy tune:
"Making your home equity work for you..."
And every time it's on, I sing over top of it:
"Taking your home equity away from you..."
What confuses me is that some people don't understand that the bank doesn't have to give them back the money. A HELOC is a privilege (a questionable one), not a right. It's all based on what the bank thinks you're really good for right now...you paid the money to them fair and square in exchange for equity if you choose to liquidate (or sell part back to the bank). But the bank has every right not to buy this time.
Wow, 41 million huh? Care to invest some of that in Gen X Finance? ;)
There certainly are good uses for leveraging home equity, that is without question. Unfortunately, John Q. Public doesn't have the intelligence or restraint to properly utilize these funds most of the time. And that is Yahoo's target audience.
Now you know why Microsoft does/doesn't want to buy yahoo.
There's an old saying: match the term of the loan to the useful life of the purchase (which means, that you would never buy a plasma TV, car, or vacation with a 30 year loan ... even if you were dumb enough NOT to pay cash in the first place!).
However, there are two great uses for a Home Equity Line of Credit (I have a 41.25 Million one right now, just for this purpose):
1. To use for investments in stocks (direct, not Funds) and real-estate, and
2. As a proxy for an 'emergency fund' (but, you have to be able to pay it back within 3 - 6 months, if you do).
Yikes. Personal finance-savvy people like you and me can look at this and recognize right off the bat that this is NOT a good idea. However, I can guarantee there are tons of people out there who are struggling to make ends meet and are unaware of the dangers of taking out money against your home. While I agree with Meg that it could be much worse, I still think it's not totally wise to advertise this and make it look so easy and risk free. The main problem I have with it is that the "Make your big dreams a reality" line implies that you should borrow against your home for any fancy you might have -- like that new car or family vacation. I think a home equity loan is something that shouldn't be taken lightly and used for frivolous expenses. I think the lead should have been "Struggling to make ends meet?" implying that it should only be used when absolutely necessary.
I don't think it's reckless. In fact I think it is pretty well done as far as being simple and informative and stressing "come learn," "calculate the difference," and "see current rates."
Reckless would be "No risk! No hassle!" "Low Payments!" Get a $100,000 loan for just $100/mo!" "All you have to do is sign!"
Home equity loans are not bad or evil, and to say that they are is nothing more than a dramatic overreaction to the fact that real estate prices are returning to their mean return in many areas - which is still a positive return over time and unlikely to ever be otherwise.
You could start a post series titled "Retitle This Ad".
My entry would be:
Screw Yourself Royally with Yahoo's Help: Refinance And Increase Payments to More than You Can Afford!"
I doubt it would have the same appeal, but it would be a better description of what Yahoo! is going for.
I saw the exact same ad and I agree with you Jeremy, its reckless. Borrowing against equity is not bad in some ways. When rates are low financing via home equity still beats some conventional ways. The best example I can think of is financing a business or other lucrative investment. Home equity is also beneficial if there was a big purchase that would otherwise be financed with a higher rate loan, such as a used car. However, because Yahoo has such a wide audience , some financially sophisticated some not, they are definitely being reckless. The way the word the ad plays to your emotions and presents a home equity loan or HELOC as a short cut to your "dreams"..They also make it seem like a simple and fast process with the "turn it into cash" line. It's an effective but reckless ad. By the way how many homes in America look like that one in the ad lol.
H_Roarke, I don't have a link to the actual study I used when writing this bookmarked on this computer, but here is a page that lists 8.6% from 1978-2004. CNN Money: Stocks vs. Real Estate
Yahoo seems to be a little late to the party. Not surprising considering how far they have slid as a company in general. Foolish.
Where did you get 8.5% for real estate returns?
Let's just say that the state of the real estate market, up until recently, coupled with the wide (careless?) availability of home equity loans and lines of credit, have led people to think that their house equity is really cash.
As such, they have been trained to spend it on whatever they want. But times are changing. Lately news stories have broken out about people with high credit scores being denied home equity loans. Banks are tightening their credit approval processes.
In the end, while I agree that the premise of this ad is very wrong, I do believe that its impact (and that of similar others) will ultimately be limited. Banks are overcompensating for their past mistakes.