Is there a homeowner debt problem in Madison?

According to The Capital Times (or new spiffy online newspaper, or should I say our newly online newspaper?), Forbes magazine has ranked Madison in the top ten most overextended homeowner debt markets. I have to admit that this surprised me somewhat, as I had not realized how much leverage had been exerted in the Madison market. The study shows that of the largest 150 markets Madison is near the top in terms of number of homes with a second mortgage or home equity line of credit.

Home equity loans are more popular than ever, however. The Federal Reserve Board says the total amount of outstanding home equity loans grew from $260 billion in 1995 to $970 billion in 2005.

These loans are popular when property values are rising since homeowners receive cash and can deduct the interest. Problems come when prices fall, however.

Of note from this quote is the "can deduct interest" line. If there is one group that hasn't been attacked or blamed for the current problem, it's the government. I believe it there is a serious public policy error in our tax code, which incentivizes over consumption on homes. This type of policy was never going to be sustainable, but hey what part of our tax policy is?

Sometimes, I think I could be an economist...

"People took money out of their homes to spend it," says Scott Hoyt, director of consumer economics at Moody's Economy.com. "There are significant, negative implications for contractors and retailers because consumers will be drastically cutting back on their spending."