Forced by notorious scandals, American business has had to reconsider the value and function of credit in operating an ongoing business. Likewise, investors, private and institutional, have been forced to reconsider the inherent worth of companies beset by massive borrowings -- Their misevaluation has cost them an estimated $8 trillion in lost wealth in the last several years. On the other hand, American Consumers especially homeowners, have not faced the realities of debt and its servicing. The question remains whether the American homeowners will realize the limits of credit in time to prevent the potentially devastating burst of the housing bubble.

For consumers in the last ten years, the home has become an equity investment, not just an habitat. Over the past 10 years, the average price of single-family homes has increased 15 percent relative to the average bundle of goods and services (core personal consumption expenditures), according to the Federal Reserve Bank of St. Louis.

In the past couple of years, American households' loss of $4 trillion in stocks was cushioned by gains of $1.2 trillion in home equity. In the current economic doldrums, homeowners have been tapping their equity partly in response to an avalanche of marketing by the mortgage banking industry. Through refinancing, Americans last year pulled $90 billion in cash from their homes, and took out tens of billions more through home-equity loans

The mortgage industry has been overwhelmed. Between September 2001 and September 2002, the mortgage banking industry added 44,000 jobs, a 13 percent jump, according to the U.S. Commerce Department.

The Mortgage Bankers Association of America (MBAA) reported that refinancing applications for the week ended Oct. 4 rose 3.8 percent, to their highest level since the group began tracking the data a decade ago. Refinance applications accounted for 77.9 percent of the total mortgage applications, just short of the 78.4 percent record set the week ended Nov. 9, 2001.

Home appreciation is nothing more than a paper gain, unless the appreciation is transferred into cash. The homeowner in tapping home equity, increases his/her financial burden in two ways. A new liability is added, and a new monthly expense is incurred. For the average homeowner, wages have not increased substantially. So long as the monthly income remains constant, all is well. The new debt is serviced. But any major economic downturn with the major loss of jobs would cause the robust housing sales to slow, or worse to collapse.

In other words, the homeowner is susceptible to the same loss in confidence that destroyed the high technology sector. For, the collapse of the internet-based industries came when future expectations vanished. The majority of these companies were born and survived on investor capital, until, the viability of future earnings was questioned. The housing market is also based on mass perception - for example that housing is in limited supply, new arrivals need housing, home prices have increased every year. Should the economy remain sluggish, more terrorist attacks occur, or a Middle East war causes an oil-price spike, then these commonly held perceptions of housing and its value could suffer the same fate as high technology stocks.

I have always held that the contemporary concept of creative financing or 'leverage' -- the use of outside funds to acquire assets -- began in the early eighties when loan sources dried up under the weight of extraordinary interest rates. Innovative homebuyers and real estate brokers introduced the concept of seller financing. The seller became the bank and the homebuyer became the borrower.

Both the era of mergers and acquisitions of the 80's and the capitalization of new high tech firms in the 90's were built on this simple concept of leverage which began when homeowners provided seller financing and homebuyers discovering leverage. Excesses led to the downfall of the merger and acquisitions and high tech booms. Now we are seeing an extraordinary rush to refinance by homeowners. The country, which relies so much on consumer spending, financed in large part by home refinancing, will escape the burst of the housing bubble only if American companies recover in time. If not, the final economic bubble burst will be harsh and very painful to all Americans, not just homeowners.

• Write to Arthur at bruzzone@rightturns.com

Award-winning TV producer, talk show host, and Republican leader Arthur Bruzzone has written over 150 political articles for national and regional media, and has commented on political issues for American and European television and radio networks.  His articles and columns have appeared in the Wall Street Journal, San Francisco Chronicle, San Francisco Examiner, Campaign & Elections Magazine, among other publications.

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