Keep an eye on your equity

Lay off the home leverage, and go easy on the remodeling projects.

By Ellen Florian Kratz, Fortune writer

NEW YORK (Fortune) -- The Downies borrowed against their growing home equity to improve their home, but not everyone has been so wise. Of the nearly $2.8 trillion that Americans have withdrawn from their homes in the past five years, plenty has gone toward such farsighted capital improvements as trips to Disney World, fancy clothes, boats, etc.

The good news, of course, is that reckless spending has kept the American economy chugging. But it has also saddled many American families with some major debt, which is particularly dangerous in a declining real estate market.

Bottom line: Lay off the home leverage, because if you run into trouble, the price appreciation won't be there to bail you out. According to the forecast, only four of the 100 metro areas are expected to grow by more than 5 percent next year. That's a big comedown from the frothy 20 percent, 15 percent, or even 10 percent annual increases that you've been conditioned to expect as normal.

One more piece of advice on the equity front: Go easy on remodeling projects. When housing appreciation was through the roof, a $100,000 state-of-the-art kitchen probably paid dividends if the home went up for sale. Today that's no longer the case, so you need to think hard before shoveling a lot of extra money into your abode. Spiffing up in order to go to market is one thing; ripping up the entire first floor to improve the layout is another.

"If you're trying to determine whether a home improvement is a good investment, it's probably measurably less so than it was," says Zandi. As careful as the Downies have been with their equity, they also have dreams of making their home utterly fabulous. One amenity they've always wanted: an outbuilding for holding summer parties, which would cost $30,000 to build. Considering the current real estate market, those plans, utterly fabulous though they may be, are on hold indefinitely.

It's a new market. And as far as sensible homeowners like the Downies are concerned? Solvent is the new fabulous.

6 strategies to survive the bust

Lower your expectations

Drive a hard bargain.

Consider renting

Step away from the exotic mortgage

Shop for a rate drop

Keep an eye on your equity

Reporter associate Doris Burke contributed to this article.

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